Illustration of abc analysis, Managerial Accounting

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Illustration: ABC analysis

Combine items on the basis of their relative value to form three categories—A, B and C. The data in the table below illustrates the ABC analysis.

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The tabular and graphic representation indicates that "Item A" forms a minimum proportion, 15 per cent of total units of all items, but represents the higher value, 70 per cent. On the other hand, "Item C" represents 55 per cent of the total units and only 10 per cent of the total value.  "Item B" occupies the middle place.  Items A and B jointly represent 45 per cent of the total units and 90 per cent of the investment. More than half of the net units are item C, representing merely 10 per cent of the investment. Thus, a tighter control should be exercised on "Item A" in order to maximize profitability on its investment. In case of "Item C" simple controls will be sufficient.

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