Overall inventory turnover

Overall inventory turnover
A . 2 and 4 only
B . 1 and 4 only
C . 2 and 3 only
D . 1 and 3 only

View Answer

Answer: C

Explanation:

ABC analysis is applied to stock and its management. It is based loosely on the Pareto principles, better known as 80/20 rule. Pareto principle is the theory that 80% of outcome results from 20% of

inputs. For example, 80% of sales are to the top 20% of customers; 80% of spend on inventory is accounted for by the top 20% of stock items.

The ABC concept is based on Pareto’s law.

The following steps are carried out for the ABC analysis.

– Step 1: Compute the annual usage value for every item in the sample by multiplying the annual requirements by the cost per unit.

– Step 2: Arrange the items in descending order of the usage value calculated above.

– Step 3: Make a cumulative total of the number of items and the usage value.

– Step 4: Convert the cumulative total of the number of items and usage values into a percentage of their grand totals.

– Step 5: Draw a graph connecting cumulative % items and cumulative % usage value. The graph is divided approximately into three segments, where the curve sharply changes its shape. This indicates the three segments A, B and C.

LO 2, AC 2.1