A.B.C. analysis is a selective technique of controlling different items of inventory. In actual practice, thousands of items are included in business as inventories. But all these items are not equally important. According to this technique, only those items of inventory are paid more attention which are significant for business. According to this technique, all items are classified into 3 categories A.B. and C. In ‘A’ category those items are taken which are very precious and their quantity or number is small.

(ii) In ‘B’ category those items are reserved which are less costly than the items of category ‘A’ but their number is greater.

(iii) In category ‘C’ all those items are included which are low priced but their number is highest.

The rate of use of items of category ‘A’ is the highest and that of category ‘C’ is the lowest. In a manufacturing organisation, the items of inventory can be classified as under:-

Example:-

Thus, the number of items of category ‘A’ are 15% but their value is 70% of total inventory. Therefore, inventory management can be made more effective by concentrating control on this category. Effort are made to minimise investment items of this category. The % of number of items in category ‘B’ is 30 but their value is 20%. Therefore this category will be paid less attention. The items in category ‘C’ is 55% but their value is just 10% of total. Therefore, management need not spend much time for control of this class of inventory because very little investment is made in them. These items are purchased in bulk quantity once in 2-3 years. The management must be aware that theses items may be less important in terms of value but their non-availabetety can break down the production process. Therefore, these item should available in time A.B.C. analysis can be presented by following diagram also.

Advantages of ABC Analysis

(1) A Close and strict control is facilitated on the most important items which constitute a major portion of overall inventory valuation or overall material consumption & due to this, costs associated with inventories maybe reduced.

(2) The investment in inventory can be regulated in proper manner & optimum utilisation of available funds can be assured.

(3) A strict control on inventory items in this manner help in maintaining a high inventory turnover rates.