Question

(TCOs 3, 6, and 10) Explain the purpose of an ABC classification system and how might it be useful in developing a cycle count plan or process.

Answer 1

ABC classification system is also known as the Activity Based Costing. This is an inventory categorization system in which the available resources are divided into 3 categories- A, B,C in the order of criticality. This means A is the most critical task and C is the least critical task. The objective of this classification system is that the managers must lay special attention to the A tasks and not waste much time on the C tasks.

This process is very vital for developing a cycle count plan. Cycle counting is the methodology of counting the available inventory items as per a schedule so that all items get counted at least once in the year. To prepare a cycle count plan, ABC classification system uses the principle that the percentage of items present in the warehouse relates to the percentage of sales of that item. The advantages of using ABC system is that it increases the cycle count efficiency and is time as well as cost effective.