A About 20% of items, account for 80% of dollar usage B About 30% of
Question:
A – About 20% of items, account for 80% of dollar usage
B – About 30% of items, account for 15% of dollar usage
C – About 50% of items, account for 5% of dollar usage
Steps in making an ABC Analysis
- Establish the item characteristics that influence the results of inventory management.
- This is usually annual dollar usage but may be other criteria, such as scarcity of material.
- Classify items into groups based on the established criteria.
- Apply a degree of control in proportion to the importance of the group.
For simplicity, only dollar usage will be used.
The procedure for classifying by annual dollar usage is as follows.
- Determine the annual usage for each item
- Multiply annual usage of each item by its cost to get its total annual dollar usage.
- List the items according to their annual dollar usage (from largest to smallest).
- Calculate the cumulative annual dollar usage.
- Examine the annual usage distribution and group the items into A, B and C groups based on % of annual dollar usage.
EXAMPLE:
A company manufactures a line of 10 items, their usage and unit costs are shown in the following table.
- Calculate the annual $ usage for each item
Part Number | Unit Usage | Unit Cost | Annual Dollar Usage |
1 | 1100 | 2.00 | 2200.00 |
2 | 600 | 40.00 | 24,000.00 |
3 | 100 | 4.00 | 400.00 |
4 | 1300 | 1.00 | 1300.00 |
5 | 100 | 60.00 | 6,000.00 |
6 | 10 | 25.00 | 250.00 |
7 | 100 | 2.00 | 200.00 |
8 | 1500 | 2.00 | 3,000.00 |
9 | 200 | 2.00 | 400.00 |
10 | 500 | 1.00 | 500.00 |
- List items according to their annual dollar usage (on reverse).
- Calculate the cumulative annual dollar usage, and cumulative % usage
- Group items into A, B, C, classification
Part Number | Annual Dollar Usage | Cumulative Dollar Usage | Percentage Usage | Cumulative Percentage Usage | Classification |
2 | 24,000.00 | 24,000.00 | 62.75 | 62.75 | A |
5 | 6,000.00 | 30,000.00 | 15.69 | 78.43 | A |
8 | 3,000.00 | 33,000.00 | 7.84 | 86.27 | B |
1 | 2,200.00 | 35,200.00 | 5.75 | 92.03 | B |
4 | 1,300.00 | 36,500.00 | 3.39 | 95.42 | B |
10 | 500.00 | 37,000.00 | 1.31 | 96.73 | C |
9 | 400.00 | 37,400.00 | 1.05 | 97.78 | C |
3 | 400.00 | 37,800.00 | 1.05 | 98.82 | C |
6 | 250.00 | 38,050.00 | 0.66 | 99.48 | C |
7 | 200.00 | 38,250.00 | 0.52 | 100.00 | C |
Calculation = Individual Cumulative Dollar Usage (Column 3) X 100% =
Total Cumulative Dollar Usage (column 3)
24,000.00 X 100% = .6274509 X 100% = 62.74509 OR 62.75
38,250.00
Assignment Activity:
In the charts below, perform an ABC analysis for the 10 part numbers using the example above for reference as required.
Part Number | Annual Unit Usage | Unit Cost | Annual Dollar Usage |
1 | 21,000 | 1.00 | |
2 | 5,000 | 40.00 | |
3 | 1,600 | 3.00 | |
4 | 1,200 | 1.00 | |
5 | 500 | 100.00 | |
6 | 50 | 55.00 | |
7 | 880 | 4.00 | |
8 | 11,100 | 3.00 | |
9 | 4,000 | 1.00 | |
10 | 5,000 | 1.00 |
Part Number | Annual Dollar Usage | Cumulative Dollar Usage | Percentage Usage | Cumulative Percentage Usage | Classification |
Calculation = Individual Cumulative Dollar Usage (Column 3) X 100% =
Total Cumulative Dollar Usage (column 3)
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill