ACTIVITY BASED COSTING (ABC) METHOD

ACTIVITY BASED COSTING (ABC)

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ABC Plan

ABC Plan is used to control the inventory by applying security measures or controls on each category. Through this technique management is able to apply measures according to the value of item i-e high or tight security measures on high value items and vice versa.

ABC Plan is also known as Material Control by Exception or Material Selective control model

Category Of Material

The three categories of material, on the basis of which security measures or controls are applied on the material or inventory, are as fallows

  • CLASS A MATERIAL
  • CLASS B MATERIAL
  • CLASS C MATERIAL

Class A ITEMS

  • High value in total inventory
  • Low in quantity
  • Restrict controls are applied

Class b items

  • Average value in total inventory
  • Average in quantity
  • Moderate controls are applied

Class c items

  • Low value in total inventory
  • High in quantity
  • Loose controls

 

STEPS TO SOLVE THE QUESTION

STEP 1: Determine/ Estimate annual usage or annual consumption of each item

STEP 2: Determine/ Estimate per unit cost of each item

STEP 3: Determine annual usage/consumption value or cost of each item

STEP 4: Categorize items as A, B, C on the basis of total annual consumption cost/usage value

STEP 5: Compute for each item its percentage

%age = (Number of units of each item ÷ Total units of all items) × 100

%age in value = (Total value of each item ÷ Total value of all the Material) × 100

STEP 6: Plot the graph by taking percentage of total cost on x-axis and percentage of total usage on y-axis

 

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