SKEDSOFT

Procedure for ABC analysis:

1)      List out all items in stores along with their unit price and annual consumption.

2)      Calculate the annual consumption cost of each item, which is given by multiplying the quantity consumed in the time period and the unit cost. If ‘q’ is the quantity consumed in the time period and ‘p’ is the unit price then annual consumption value = q × p = qp.

3)      Rearrange the list in the descending order of the annual consumption cost. i.e. highest cost at the top and next highest is the second and so on and the last item is the lowest consumption value item.

4)      Calculate the cumulative total of annual consumption value.

5)      Find the parentage of each cumulative value with respect to the total cost of inventory.

6)      Mark a line at 70%, 90% and at 100%. All the items covered by 70% line are ‘A’ class items, those which are covered between 70% line and 90% line are ‘B’ class items and those are covered by 90% and 100 % are ‘C’ class items.

Example: The details of material stocked in a company are given below with the unit cost and the annual consumption in Rs. Classify the material in to A class, B class and C class by ABC analysis.

Solution

First let us find the annual usage value for each item (unit price × annual usage) and rank them in descending order.

List the items in their descending order of annual consumption value, find the cumulative value of annual consumption value and find the percentage of cumulative value with respect to total inventory value. Draw lines at 70%, 90% and at 100%.