Question

Problem 1: ABC Classification System

Item #	Price/Unit	# of Item
101	$ 1400	15
201	$   400	25
303	$     60	45
405	$     70	15

                  Answer:    101=               201=                303=              405=

Answer 1

Total units of products = 15+ 25+45+15 =100 units

total consumption value ( calculated separately below) = $21,000 + $10,000+ $2700+ $1050 = $34,750

1.Item 101

Cost per unit : $1400

No. Of units = 15

Annual consumption value = cost per unit × no of units

= 1400$ × 15 = $21,000

% of annual units sold = no of units of item 101/ total units × 100

=15/100×100=15%

% of annual consumption value = 21,000/34,750 ×100= 60.43%

2. Item 201

Cost per unit = $400, no of units =25

Annual consumption value (ACV) = 400×25= 10,000$

% of annual units sold = 25/100 ×100 = 25%

% of ACV= 10,000/34,750×100 = 28.77%

3. Item 303

Cost per unit=$60

No. Of units =45

Annual consumption value= $2700

% of annual units sold = 45/100×100= 45%

% of ACV = 2700/34750×100 = 7.76 %

4. Item 405

cost per unit= $70

^{no of units = 15}

^{annual consumption value = 70 ×15 = $1050}

^{% of ACV = 1050/34750 ×100 = 3.02%}

% of annual units sold = 15 /100 ×100 = 15

% of annual consumption value = 1050/

thus, by the calculation shown above we can use the data to classify the items as per ABC classification.

ABC classification is used in business to identify the most important stocks and to keep a regular eye on them.

1. In the category A, we have products that are most important and valuable. It is the smallest category, but it takes up the highest consumption value in dollars.

• If we see item 101, then it is only 15% of the total units but its consumption value in percentage is 60.43%. Thus, in terms of value though it is the smallest category but it is most valuable and extremely important

2. In the B category, the products are higher in terms of no of units, but the cost of product is relatively low.

We can see this in item 201.

It makes up for around 25 % of the inventory but it costs only 28% of the total consumption value.

Items in category B are moderately important.

3. In category C, we observe that these products make up for the highest inventory, but in terms of money they are very cheap.

This can be observed in item 303 and item 405.

Together, they constitute about 60% of the inventory but their value in terms of consumption is only 10% together.

Items in category C are relatively unimportant.