Reference no: EM131173662
CONCEPT REVIEW:
The A-B-C approach classifies inventory items according to some measure of importance, usually annual dollar value (i.e., dollar value per unit multiplied by annual usage rate), and then allocates control efforts accordingly.
Typically, three classes of items are used:
A (very important),
B (moderately important), and
C (least important).
However, the actual number of categories may vary from organization to organization, depending on the extent to which each wants to differentiate control efforts.
With three classes of items, A items generally account for about 10 to 20 percent of the number of items in inventory but about 60 to 70 percent of the annual dollar value.
At the other end of the scale, C items might account for about 50 to 60 percent of the number of items but only about 10 to 15 percent of the annual dollar value.
These percentages vary from firm to firm, but in most instances a relatively small number of items will account for a large share of the value or cost associated with an inventory, and these items should receive a relatively greater share of control efforts.
1.The A-B-C approach typically classifies inventory items according to:
The relative quantity
The warehouse space available
The physical size of items
The First In First Out rule
The annual dollar value
2. The "annual dollar value" used in the A-B-C approach refers to:
Production plan cost
Dollar value per unit multiplied by annual usage rate
Storage cost of inventory multiplied by average annual inventory
Price of the final product multiplied by year-end inventory
Price of the inventory item multiplied by average annual inventory
3. Items classified as "A" using the A-B-C approach generally account for about:
Top 35% of items according to annual dollar value
Top 5% of items according to annual dollar value
Bottom 50% of items according to annual dollar value
Top 50% of items according to annual dollar value
Top 15% of items according to annual dollar value
4. Items classified as "B" using the A-B-C approach generally account for about:
Bottom 50% of items according to annual dollar value
Middle 50% of items according to annual dollar value
Middle 15% of items according to annual dollar value
Middle 35% of items according to annual dollar value
5. Items classified as "C" using the A-B-C approach generally account for about:
Bottom 15% of items according to annual dollar value
Bottom 35% of items according to annual dollar value
Top 50% of items according to annual dollar value
Bottom 50% of items according to annual dollar value
Middle 35% of items according to annual dollar value
Bottom 15% of items according to annual dollar value
Bottom 35% of items according to annual dollar value
Top 50% of items according to annual dollar value
Bottom 50% of items according to annual dollar value
Middle 35% of items according to annual dollar value6.