ABC Analysis - Material Cost, Cost Accounting Video Lecture | Cost Accounting - B Com

ABC analysis what is ABC analysis it is
a form of inventory control it is
basically a form of inventory control or
material cost control wherein we will be
excising control over materials by
classifying them into three categories I
mean the materials would be classified
into three categories it is categorized
as category a category B and category C
see why we should classify the material
into three categories we are classifying
because the category a would generally
be called as highly important materials
and category B would be called as
moderately important materials and
category C material would be called as
least important materials so we are
going to classify the material into
three categories as highly important
moderately important and least important
so if you see the value of the materials
in percentage let's say the highly
important material constitutes seventy
percentage in value seventy percentage
in value and moderately important
materials constitutes twenty percentage
in value and least important materials
constitutes ten percentage in value but
if you take the percentage in quantity
the highly important materials which are
70 percentage in value would be one li
ten percentage of total quantity and the
moderately important materials would be
say twenty percent in quantity whereas
least important materials which are ten
percentage in value would be seventy
percentage in quantity so now we
understand that there are three
categories of materials and certain
materials would be too huge in quantity
but they
are very less in value and certain
materials they are very less in quantity
and too huge in value so now we can
decide how we should place our control
it is not going to reward us if all our
attention is on this seventy percentage
because its value is one Li ten
percentage so our more attention should
be on those material through they are
only ten percentage in quantity their
value is seventy percentage so how our
control should be we should have
constant control on these materials
which may be classified as a category we
should have strict control we should
check their stock levels periodically we
should have budgets we should evaluate
their ratios we should have economic
order quantity for all those materials
which come under category a whereas for
the material under category B it would
be sufficient if we just go on
need-based whereas the material under
category C where they are seventy
percent in quantity but only ten percent
in value we can access very little
control over them we can focus on saving
the associated cost so this is the
advantage of your ABC analysis parent
you categorize the material into three
you will find which is highly important
which is moderately and which is least
important and you can decide your
control based on the category of
materials so this has its own advantages
so let us understand what are the
advantages of ABC analysis number one
you will have smooth flow that's more
important because ABC analysis is going
to ensure that the minimum investment
will be made in inventories of stocks of
materials without affecting the
production schedule
number two this is going to ensure cost
savings because the cost of placing
orders receiving the goods and
maintaining the stocks is minimized
especially if you have the system that
is coupled with determination of proper
what is known as economic order quantity
the third advantage is you are going to
employ what is known as controlled by
exception here the management time is
saved because the management is going to
pay its attention only on a category
items here the attention need to be paid
only to some of the items rather than
all items so you are going to have
control by exception and number four you
will have standardization of work
standardization of work is possible by
introducing the ABC system so much of
the work which is connected with the
purchases can be systematized on a
routine basis and it can be handled by
subordinate staffs itself