## ABC Analysis

ABC Analysis is a selective inventory control technique that ranks materials by cost (value), not by units.

### Steps

1. Calculate Total Cost of each material: `Units × Cost per Unit`.

2. Rank them from highest cost to lowest.

3. Classify by cumulative cost share:

A — Top ~70% of total cost (typically the fewest items by count)
B — Next ~20%
C — Remaining ~10% (typically the largest item count, smallest value)

### Control Approach

Category	Characteristic	Control Required
A	Expensive inventory	Accurate / tight control
B	Moderate value inventory	Moderate control
C	Low cost inventory	Minimum control

### Why ABC?

The firm's attention is finite. Tight control over the few expensive A items gives the biggest payoff, while loose control over many cheap C items saves administrative effort.

Worked example

### Example 1

Example: A firm has 10 items. After computing `Units × Cost`, item rankings show:

Items 1–2 = 70% of total value → Category A (tight control, frequent audit)
Items 3–5 = 20% of total value → Category B (moderate review)
Items 6–10 = 10% of total value → Category C (bulk control)

⚠️ Common exam mistakes

Ranking by units instead of by total cost — a high-volume cheap item may wrongly be flagged as A.
Treating the 70/20/10 split as a rigid rule — actual cut-off depends on data; these are typical guidelines.
Applying tight control uniformly to all items — defeats the purpose of ABC.

Reference:

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