Question

What does ABC stand for in accounting and what does it mean and how is it use?

Answer 1

ABC analysis refers to Always Better Control.

It is the selective inventory control technique

It is one of the inventory categorization technique.

It is also called Pareto rule 20/80.

According to ABC analysis inventories or events or activities are categorized into 3 classes.

A-class items

B-class items

C-class items

A class items are more important to the organization. They have high annual consumption value. Nearly 70 percentage of funds are invested in this category.

A class items needs more supervision and safety.

Keeping these inventories in a safest place.

2) B class items are moderate important to the business organization. Price is also moderate.

It has a nearly 20 percentage of annual consumption value. U may purchase these inventories once in a month or twice. These are also needs safest place and moderate supervision.

C class items are having large quantities but less annual consumption value say 10 percentage.

These are low cost items. You can purchase these items in bulks for every three months or six months as per the organization requirements.these items needs low supervision costs

Uses of ABC analysis

1) classification of inventory

2)cost control is very easy

3) No need to focus same on all these categories. Focus is based on the importance of that inventories.

4) Easy identification of items are placed.

5)you can reduce the supervision costs and storage unit costs by applying this technique.

6) maintaining stock levels are very easy.

7) purchasing inventories by understanding the annual demand and the market rates

Conclusion : ABC analysis help to the managers for cost control. This technique will gives you more understanding on inventory management .now a days organizations are applying this concept on different jobs or works. Thank you