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ABC Analysis:

The ABC analysis classifies various inventory items into three set or groups of priority & allocates managerial efforts in proportion of the priority.
           Class A – Most important
           Class B – Intermediate important
           Class C – Remaining items
The finance manager should monitor different items belonging to different groups in that order of priority.

Under ABC analysis , different items may be placed in different groups as follows:

i)    On the basis of annual consumption. Item with highest value is given top priority and so on. The annual consumption value of all the items ,already arranged in priority order, are then shown in cumulative terms for each and every item.

ii)    Thereafter , the running cumulative totals of annual value of consumption are expressed as a percentage of total value of consumption.

iii)    Then these cumulative percentage of consumption  values are divided into three categories i.e.,
                     Group    Cumulative percentage value
                         A                      60-70%
                         B                   next 20-25%
                         C                Remaining items

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