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St. Paul University Philippines: Quiz #1. Test I. 1. What Is ABC Analysis?

ABC analysis is an inventory categorization method that divides items into A, B, and C categories based on their value, with A being the highest value. The advantages of ABC analysis include more accurate product costing, identifying cost behaviors, and better decision making. Some disadvantages are that ABC can be more expensive and complex to implement than traditional costing systems.

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103 views4 pages

St. Paul University Philippines: Quiz #1. Test I. 1. What Is ABC Analysis?

ABC analysis is an inventory categorization method that divides items into A, B, and C categories based on their value, with A being the highest value. The advantages of ABC analysis include more accurate product costing, identifying cost behaviors, and better decision making. Some disadvantages are that ABC can be more expensive and complex to implement than traditional costing systems.

Uploaded by

Student Xian
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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St.

Paul University Philippines


Tuguegarao City, Cagayan North 3500

SCHOOL OF BUSINESS ACCOUNTANCY AND HOSPITALITY MANAGEMENT

Name: CHRISTIAN B. BERMUDEZ Course, Year & Section: BSBA-OM2

Subject: Inventory Management System


Quiz #1.
Test I.
1. What is ABC Analysis?
-ABC analysis is a type of inventory categorization method in which inventory is
divided into three categories, A, B, and C, in descending value. A has the highest value
items, B is lower value than A, and C has the lowest value.
2. What are the advantages and disadvantages of ABC Analysis?

The following are the advantages of ABC:


1. Accurate Product Cost:

ABC brings accuracy and reliability in product cost determination by focusing on cause and

effect relationship in the cost incurrence. It recognizes that it is activities which cause costs, not

products and it is product which consume activities. In advanced manufacturing environment and

technology where support functions overheads constitute a large share of total costs, ABC

provides more realistic product costs.

2. Information about Cost Behavior:


ABC identifies the real nature of cost behavior and helps in reducing costs and identifying
activities which do not add value to the product. With ABC, managers are able to control many
fixed overhead costs by exercising more control over the activities which have caused these fixed
overhead costs. This is possible since behavior of many fixed overhead costs in relation to
activities now become more visible and clearer.

3. Tracing of Activities for the Cost Object:


ABC uses multiple cost drivers, many of which are transaction based rather than product volume.
Further, ABC is concerned with all activities within and beyond the factory to trace more
overheads to the products.
4. Tracing of Overhead Costs:

ABC traces costs to areas of managerial responsibility, processes, customers, departments


besides the product costs.

5. Better Decision Making:

ABC improves greatly the manager’s decision making as they can use more reliable product cost
data. ABC helps usefully in fixing selling prices of products as more correct data of product cost
is now readily available.

6. Cost Management:

ABC provides cost driver rates and information on transaction volumes which are very useful to
management for cost management and performance appraisal of responsibility centers. Cost
driver rates can be used advantageously for the design of new products or existing products as
they indicate overhead costs that are likely to be applied in costing the product.

7. Use of Excess Capacity and Cost Reduction:

ABC, through the processes of pooling of activity costs and the identification of cost drivers, can
lead to a range of applications. These include the identification of spare capacity and the
fostering of cost reduction by comparing the resources required under ABC with the resources
that are currently provided. This provides a platform for the development of activity-based
budgeting in which the resource relationships identified by ABC are used to project future
resource requirements.

8. Benefit to Service Industry:

Service organizations, such as banks, hospitals and government departments, have very different
characteristics than manufacturing firms. Service organizations have almost no direct costs, most
of the costs are overheads and they do not hold stocks of service as the service is consumed when
it is produced. Traditional costing has generally been considered inappropriate for these
organizations, whereas ABC offers the potential of benefits from improved decision making and
cost management.

The following are the demerits of ABC:


1. Expensive and Complex:

ABC has numerous cost pools and multiple cost drivers and therefore can-be more complex than
traditional product costing systems. It can prove costly to manage ABC system.

2. Selection of Drivers:

Some difficulties emerge in the implementation of ABC system, such as selection of cost drivers,
assignment of common costs, varying cost driver rates etc.

3. Disadvantages to Smaller Firms:

ABC has different levels of utility for different organization such as large manufacturing firm
can use it more usefully than the smaller firms. Also, it is likely that firms depending on cost-
plus pricing can take advantages from ABC as it gives accurate product cost. But those firms
who use market-based prices may not favor ABC. The level of technology and manufacturing
environment prevailing in different firms also affect the application of ABC.

4. Measurement Difficulties:

The main costs and limitations of an ABC system are the measurements necessary to implement
it. ABC systems require management to estimate costs of activity pools and to identify and
measure cost drivers to serve as cost allocation bases. Even basic ABC systems require many
calculations to determine costs of products and services. These measurements are costly. Activity
cost rates also need to be updated regularly.

Test II: Solve the following Problems:


What are the appropriate ABC groups of inventory items?

ABC Group

Class Items Annual Volume Percent of $ Volumes

A A, B 21, 500 79.5

B C, D 4, 75 17.6

C E, F, G, 800 2.9
H, I
∑=100.0

Item E is a call to judgment. Some establishments may consider it to be a B product. However,


the modern tendency is to move items to as low a level as possible so reducing inventory
management cost.
Problem 2: What are the appropriate ABC groups of inventory items?

Resource Total Cost % usage of Cumulative


Quantity Unit price Per Year total usage % usage of
total usage
3 700 480.00 336000 49.7 49.7 A
1 450 320.00 144000 21.3 71 A
6 120 950.00 114000 16.9 87.9 B
2 3400 16.00 54400 8.0 88.7 B
5 6,500 3.50 22750 3.4 92.1 C
4 12,000 0.45 5400 0.8 92.9 C
Total 676550 ∑=101

Item number % of Item % Usage Action


A 3, 1 33.33% 71% Close control
B 6, 2 33.33% 24.9% regular
C 5, 4 33.33% 4.2% infrequency

ANA Problem 3:
A firm has 1,000 “A” items (which it counts every week, i.e., 5 days), 4,000 “B” items (counted
every 40 days), and 8,000 “C” items (counted every 100 days). How many items should be
counted per day?
Item Class Quantity Policy Number of Items to
Count Per Day
A 1,000 Every 5 days 1000/5=200/day
B 4,000 Every 40 days 4000/40=100/day
C 8,000 Every 100 days 8000/100=80/day
Total items to count:
380/days

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