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## ABC INVENTORY CLASSIFICATION

All items in a company's inventory are not equal and do not need the same level of control. Fortunately, we can apply Pareto's law to determine the level of control needed for individual items. Pareto's law implies that roughly 10 to 20 percent of a company's inventory items account for approximately 60 to 80 percent of its inventory costs. These relatively few high-dollar-volume items are classified as A items. Moderate-dollar-volume items, roughly 30 percent of the items, account for about 25 to 35 percent of the company's inventory investment. These are classified as B items. Low-dollar-volume items, about 50 to 60 percent of the items, represent only 5 to 15 percent of the company's inventory investment and are classified as C items. These percentages are not absolute and are used only as guidelines to determine an item's ABC classification.

Pareto's law

Implies that about 20 percent of the inventory items will account for about 80 percent of the inventory value.

ABC classification

A method for determining level of control and frequency of review of inventory items.

EXAMPLE 12.6 ABC Analysis at Auto Accessories Unlimited (AAU)

AAU is considering doing an ABC analysis of its entire inventory but has decided to test the technique on a small sample ...

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