Explain: ABC analysis and it advantages.
A.B.C. analysis is an analytical technique of controlling different items of inventory. This technique assumes the basic principle of ‘Vital Few Trivial Many’ which means in a business there are thousands items not equally important. According to this technique only those items are considered and given more attention which are significant from business point of view. In this technique, all items are classified under 3 categories A, B and C. In ‘A’ category those items are taken which are very important and small in quantity, ’B’ category includes relatively less costly and important items as compared to ‘A’ category and ‘C’ category includes those items which are large in number and are low priced. The importance of various items is decided on the basis of following factors:
- Amount of investment in inventory,
- Value of material consumption and
- Critical nature of inventory items.
Advantages of ABC Analysis:
1. Close and strict control is facilitated on the most important items which help in overall inventory valuation or overall material consumption.
2. Proper regulation of investment in inventory which will ensure optimum utilization of available funds.
3. Helps in maintaining a high inventory turnover rates.