Question

The X Company stocks a variety of parts and materials it uses in its manufacturing processes. Recently, as demand for its finished goods has increased, management has had difficulty managing parts inventory; they frequently run out of some crucial parts and seem to have an endless supply of others. In an effort to control inventory more effectively, they would like to classify their inventory of parts according to the ABC approach. Following is a list of selected parts and the annual usage and unit value for each:

Item number	Annual usage (items/year)	Unit cost ($)	Item number	Annual usage (items/year)	Unit cost ($)
1	36	350	16	60	$ 610
2	150	30	17	120	20
3	50	23	18	270	15
4	300	45	19	45	50
5	18	1,900	20	19	3,200
6	500	8	21	910	3
7	710	4	22	12	4,750
8	80	26	23	30	2,710
9	344	28	24	24	1,800
10	67	440	25	870	105
11	510	2	26	244	30
12	682	35	27	750	15
13	95	50	28	45	110
14	10	3	29	46	160
15	820	1	30	165	25

Required: Classify the inventory items according to the ABC approach using dollar value of annual demand. What recommendations would you give The Dynaco Company? (150 words)

Answer 1

ABC Analysis is a system of selective inventory control whereby the measure of control
over an item of inventory varies with its usage value. It exercises discriminatory control
over different items of stores grouped on the basis of the investment involved. Usually the
items of material are grouped into three categories viz; A,B and C according to their use
value during a period. In other words, the high use value items are controlled more closely
than the items of low use value.
(i) ‘A’ Category of items consists of only a small percentage i. e., about 10% of the
total items of material handled by the stores but require heavy investment i. e.,
about 70% of inventory value, because of their high prices and heavy requirement.
(ii) ‘B’ Category of items comprises of about 20% of the total items of material
handled by stores. The percentage of investment required is about 20% of the
total investment in inventories.

(iii) ‘C’ Category of items does not require much investment. It may be about 10% of
total inventory value but they are nearly 70% of the total items handled by stores.

ITEM NO	USAGE UNITS IN ASCENDING ORDER OF USAGE	UNIT COST	TOTAL COST	CUMULATIVE UNITS	% OF CUMULATIVE UNITS	CUMULATIVE COST	% OF CUMULATIVE COST	CATEGORY
1	36	350	12600	36	0.45	12600	2.25	A
14	10	3	30	46	0.58	12630	2.25	A
22	12	4,750	57000	58	0.73	69,630	12.41	A
5	18	1,900	34200	76	0.95	103,830	18.50	A
20	19	3,200	60800	95	1.19	164,630	29.34	A
24	24	1,800	43200	119	1.49	207,830	37.04	A
23	30	2,710	81300	149	1.87	289,130	51.52	A
19	45	50	2250	194	2.43	291,380	51.92	A
28	45	110	4950	239	2.99	296,330	52.81	A
29	46	160	7360	285	3.57	303,690	54.12	A
3	50	23	1150	335	4.20	304,840	54.32	A
16	60	$610	36600	395	4.95	341,440	60.85	A
10	67	440	29480	462	5.79	370,920	66.10	A
8	80	26	2080	542	6.79	373,000	66.47	A
13	95	50	4750	637	7.98	377,750	67.32	A
17	120	20	2400	757	9.48	380,150	67.74	A
2	150	30	4500	907	11.36	384,650	68.55	B
30	165	25	4125	1072	13.43	388,775	69.28	B
26	244	30	7320	1316	16.49	396,095	70.59	B
18	270	15	4050	1586	19.87	400,145	71.31	B
4	300	45	13500	1886	23.63	413,645	73.71	B
9	344	28	9632	2230	27.94	423,277	75.43	B
6	500	8	4000	2730	34.20	427,277	76.14	B
11	510	2	1020	3240	40.59	428,297	76.32	C
12	682	35	23870	3922	49.14	452,167	80.58	C
7	710	4	2840	4632	58.03	455,007	81.08	C
27	750	15	11250	5382	67.43	466,257	83.09	C
15	820	1	820	6202	77.70	467,077	83.23	C
25	870	105	91350	7072	88.60	558,427	99.51	C
21	910	3	2730	7982	100.00	561,157	100.00	C
	7982		561157