Question

DAT, Inc., produces digital audiotapes to be used in the consumer audio division. DAT lacks sufficient personnel in its inventory supply section to closely control each item stocked, so it has asked you to determine an ABC classification. Here is a sample from the inventory records:

ITEM	AVERAGE MONTHLY DEMAND	PRICE PER UNIT
1	600	$ 4.00
2	3,100	10.00
3	300	5.00
4	400	10.00
5	6,400	16.00
6	2,900	2.00
7	1,000	4.00
8	4,800	23.00
9	1,500	20.00
10	1,600	19.00

Develop an ABC classification for these 10 items.

Answer 1

Step 1: Calculate Dollar Value by multiplying the Average monthly demand by price per unit

ITEM	AVERAGE MONTHLY DEMAND	PRICE PER UNIT	DOLLAR VALUE
1	600	4	2,400
2	3,100	10	31,000
3	300	5	1,500
4	400	10	4,000
5	6,400	16	102,400
6	2,900	2	5,800
7	1,000	4	4,000
8	4,800	23	110,400
9	1,500	20	30,000
10	1,600	19	30,400

Step 2: Sort the items in descending order (largest to smallest) of dollar value.

ITEM	AVERAGE MONTHLY DEMAND	PRICE PER UNIT	DOLLAR VALUE
8	4,800	23	110,400
5	6,400	16	102,400
2	3,100	10	31,000
10	1,600	19	30,400
9	1,500	20	30,000
6	2,900	2	5,800
4	400	10	4,000
7	1,000	4	4,000
1	600	4	2,400
3	300	5	1,500

Step 3: Calculate for each item, dollar value as percent of total dollar value of all items.

ITEM	AVERAGE MONTHLY DEMAND	PRICE PER UNIT	DOLLAR VALUE	% OF TOTAL DOLLAR VALUE
8	4,800	23	110,400	34.30%
5	6,400	16	102,400	31.81%
2	3,100	10	31,000	9.63%
10	1,600	19	30,400	9.44%
9	1,500	20	30,000	9.32%
6	2,900	2	5,800	1.80%
4	400	10	4,000	1.24%
7	1,000	4	4,000	1.24%
1	600	4	2,400	0.75%
3	300	5	1,500	0.47%
		Total	321,900

Step 4: Cumulative (running sum) of % of Total dollar value

ITEM	AVERAGE MONTHLY DEMAND	PRICE PER UNIT	DOLLAR VALUE	% OF TOTAL DOLLAR VALUE	CUMULATIVE % OF TOTAL DOLLAR VALUE
8	4,800	23	110,400	34.30%	34.30%
5	6,400	16	102,400	31.81%	66.11%
2	3,100	10	31,000	9.63%	75.74%
10	1,600	19	30,400	9.44%	85.18%
9	1,500	20	30,000	9.32%	94.50%
6	2,900	2	5,800	1.80%	96.30%
4	400	10	4,000	1.24%	97.55%
7	1,000	4	4,000	1.24%	98.79%
1	600	4	2,400	0.75%	99.53%
3	300	5	1,500	0.47%	100.00%
		Total	321,900

Step 5: Classify the top few items that make up 75% of the cumulative % of total dollar value, into A category.

The items that make up the next 20% are classified as B and the last 5% as C category

Therefore, items 8, 5 and 2 are A cateogry

Items 10 and 9 are B category and,

Items 6, 4, 7, 1 and 3 are C category