what is ABC analysis? Advantages ABC Analysis and Disadvantages ABC Analysis

ABC ANALYSIS
what is ABC analysis?
what is ABC analysis? Advantages ABC Analysis and Disadvantages ABC Analysis
ABC analysis is a way of categorizing the material on the basis of the quantity of consumption and their relative values. Some material might be consumed in lower quantities but their period may be very high. Such materials are kept in group "A". Similarly, some material may be consumed in large quantities but their values may be lower. Such materials are kept in group 'C'. In between these two, some materials may be consumption in moderate quantity with the moderated price. Such materials are  kept in group 'B' under ABC analysis very close control is exercised over the material in group 'A' whereas a very little control is exercise is exercised over the material in group 'C'.
ABC ANALYSIS chart, ABC ANALYSIS format, ABC ANALYSIS image, ABC ANALYSIS sheet
The above figure shows that material to group 'A' converse a small portion on the basis of quality but it converse a very large portion on the basis of value. The materials in group 'B' have moderate value as well as quantity. The materials in group 'C' cover a large quantity but it converse a very small value. The managerial efforts to control the materials in different groups have been presented below.
ABC Category of  material, ABC Analysis

Advantages of ABC analysis
The advantages of ABC analysis are as follows:
a. Reduction in investment: under ABC analysis, the materials from group 'A' are purchase in lower quantities as much as possible. With this, the effort to reduce the delivery period is also made. These in turn help to reduce the investment in material.
b. Strict control: under ABC analysis, strict control can be exercised to the materials in group 'A' that have higher value.
c. Minimum storage cost: since, the ,material from group 'A' are purchase in lower quantities as much as possible, it reduce the storage cost as well.
d. Saving in time: since a signification effort is made for management of the material from group 'A', it helps to save time as well.
e. Economy: this method is economical, since equal time and labor is not needed for all types of materials.
Disadvantage of ABC analysis
The disadvantage of ABC analysis are as follow:
Abc analysis will not be effective if the material are not classified into the groups properly.
It is not suitable for the organization where the costs of materials do not very significantly.
There is no any scientific base for the classification of material under ABC analysis.
The classification of the materials into different groups may lead to extra cost. Hence, it may not be suitable for small organization.
Just in time (JIT) investment system
Just-in-time inventory system is one of the recently development inventory management concepts, which assumes that the purchase of inventory has to be just in time of use. Jit refers to process of acquiring material (inventory) as they are needed. Jit reduces inventory by purchasing and storing lower quantities of inventories as much as possible. The objective of jit is to maintain inventory as low as possible. Sometimes, it may even be at zero level. Thus, under jit, the inventories are received in time or purchased in time of use. It is only possible when the supplier can be relied from making the delivery of goods on time without compromising the quality. Generally, in developed countries where communication and transportation system are very efficient, the use of jit is common.
Advantages
The advantages of jit are as follows.
a. Just in time inventory system reduces the amount of money tied up in inventory of raw material and finished goods.
b. This systems creates saving of space.
c. It does not required maintaining large inventory storage facilities.
d. Just in time inventory systems minimizes wastage.
e. It helps to improve the labor efficiency.
Disadvantages
a. The effectiveness of this system depends on the co-operation and faith with the supplier.
b. This systems works well when there is proper knowledge of quality and quantity of materials needed.
c. There must be some alternative suppliers as the regular suppliers may not be able to dispatch the material all the times.
Perpetual inventory system
Meaning of perpetual inventory system
The perpetual inventory system is the way of maintaining the record of inventory in such a ways that the stock on hand can be ascertained at any time. It emphasizes the day to day checking of stock and maintains the up to date record. It is a method of recording inventory after every receipt and issue to facilitate regular checking and obviate the stocking. It provides the per
Perpetual inventory system,Perpetual inventory system format, Perpetual inventory system chart, Perpetual inventory system pdf
cept stock control as we can easily find out and verify the level band position of stock lying in the store at any moment by physical counting. Some definitions of perpetual inventory systems are given below.
Chartered institute of management accountants (CIMA), London, "a system of records maintain by the controlling department, which reflect the physical movement of stock and their current balance."
Mr. Weldon, "it is a method of recording stores balance after every receipt and issue, to facilitate regular checking and to obviate closing down for stock taking.
Perpetual inventory systems helps to ascertain the balance of each and every stock in terms of physical quantity as well as monetary value held in store at all time. For this, a company may maintain bin card, in which separate receipt and issue of material and balance of stock are recorded.
a. Bin card
A bin card is a document maintained by the storekeeper to keep the record of the receipt and issue of inventory. It records the materials received, issued and balance in store in quantitative terms. Bin is a place, rack or cupboard where materials are kept. A separate bin card is prepared for each item of material and attached or hung on the shelf; rack of pigeonhole etc. bin card gives quantities information about maximum level, minimum level and re-order level of material. It is a detailed statement of material received, issued and balance.
bin card, bin card format, bin card chart,

b. Tow bin card
Under two-bin card system, two-bin (i.e. big bin and small bin) are maintained for every items of the store. The bin ard is used for regular transactions that records the inventories issued to different departments. It is called the big bin. The bin that is used for recording the issues made from the minimum stock or safety stock is called small bin. The issue from the small bin is made when there is no sufficient stock in the big bin. The verification of stock is made through the regular bin.
c. Store ledger
It is the ledger that maintains the records of stock both in quantity and value. It is maintained by the cost accounting department. It provides the information of material received, issued, returned and balance. It is used for making decision regarding the inventory.
store ledger, store ledger format, store ledger chart, store ledger sheet

The different between bin card and store ledgers are presented in the following table.
different between bin card and store ledgers , different between bin card and store ledgers  table

Advantages and disadvantages of perpetual inventory system
The advantages of the perpetual inventory systems are as follows:
a. Objective the necessity of physical verification of all items: it obviates the necessary for the physical checking of all items of stores at the end of the year.
b. Easy to prepare final accounts: it is possible to prepare the profit and loss account and balance sheet without checking the inventory because the figure of closing stock can be taken from the bin cards  or store ledger.
c. Reliable check: A perpetual inventory system is able to provide more reliable check on the store.
d. Up-to-data and accurate records: continuous stock taking will make the storekeeper and store accountant more vigilant toward their work any make efforts to ensure that there is no leakage of the stock.
e. Planning of production is easy: production planning can be done according to the availability of material in stores since the management is constancy informed about the stores position.
f. Continuity in internal check: a system of internal check remains in operation all the times.
g. Easy to discover error and shortage of stock: error and shortage of stock are readily discovered and efforts can be made to avoid the shortage of stock in future.
h. Control over capital investment in store: the capital investment is store can be controlled since the actual can be compared with the maximum and minimum levels.
i. Control over capital investment in store: the capital investment in store can be controlled since the actual stock can be compared with the maximum and minimum levels.
j. Easy to make claim with insurance company: perpetual inventory system provides correct stock figure for claim to made with the insurance company for loss of stock destroyed by fire or others.
The disadvantages of perpetual inventory systems are as follows:
a. It is possible maintaining stock control cards, bin cards and store ledger. So it is expensive.
b. Small level organization cannot use it.
c. In right time and in right place the information about actual stock of goods may not be available.
d. Accurate costing, measuring, counting and weighting are difficult regularly.
Inventory control system design
The process followed regarding the purchase, store and issue of material for controlling the production cost is called the inventory control system design. The purchase process of material includes the preparation of the requisition, selection of the suppliers, placing the purchase order, receipt and inspection of materials and payment of bills. Under storing, the structure and location of the store as well as recording of the inventory are included. Issue of material involves availing the inventories, evaluating the inventories and recording the issue. The main objectives of the inventory control systems design are as follow.
To purchase the inventory by the authorized persons.
To purchase the inventories according to the quality needed.
To avail the suitable and facilities for store keeping.
To stop the unauthorized use of materials.
To ensure that the materials as per the records reconcile with the materials that actually exist in store.
Purchasing procedures
Material is a major component for any organization since it affects the production, quality of products, priced and sales. Thus, a systematic process is developed for the purchase of materials; purchase includes the identification of the material to be purchased, selection of the appropriate suppliers, sending the purchase order, examination of the materials to ensure that they are as per purchase order and payment of bills. The department involved in the purchase of material is called the purchase department. The purchase procedures are mentioned below:
Purchasing procedures, Purchasing procedures sheet, Purchasing procedures

The purchase department performs the following activities.
To avail the materials regularly.
To purchase qualitative materials in harmonized conditions.
To purchase the materials in economic order quantities and remove the over and under stocking of materials.
To maintain a cordial relationship with the suppliers.
To update and avail the information on supply, quality, price, purchase procedures, terms of payments, carriage process etc.
Receiving purchase requisition
The first step of a purchase procedure is receiving the purchase requisitions. It is a request made by various departments to the purchase department for purchase the requirement materials. Such purchase requisition is verified by the chief of the concerned department in which the details about the materials like quantity, codes etc are mentioned. The specimen of the purchase requisition is given below:
Receiving purchase , Receiving purchase  format, Receiving purchase  pdf, Receiving purchase sheets

Selection of suppliers
The second step of the purchase procedure is the selection of the appropriate suppliers. To look for the possible suppliers, quotations or tenders are invited. A tender involves the price, quality and other terms and conditions related to the materials. The from developed to get the required information regarding the materials to be purchased is called the tender form.
Tender form, Tender form format, Tender form pdf, Tender form image

After analyzing the tender forms received from all the probable suppliers, analysis is made to select the suppliers intending to supply the materials at the lowest price and the most favorable conditions. Beside these, the financial soundness, capacity to supply, reliability and continuity of the suppliers are also considered to select a supplier.
Sending purchase order
After selecting the suitable suppliers, purchase order is sent to get the needed materials. It is a required made to the suppliers to send the material as per the stated price and quantity. The specimen of purchase order is as below.
Sending purchase order, Sending purchase order form, Sending purchase order format, Sending purchase order photo

Each purchase order is made is 5 copies. The first copy is send to the suppliers, the second to the person or department demanding the purchase, the third to the department receiving the materials, the fourth to the accounts department and the final copy is kept purchase department itself.
Receiving and inspecting materials
The fourth step of a purchase procedure is to received and inspect the materials send by the supplier. It has to be ensured that the materials are as per the purchase order and there is no damage during the carriage. After inspecting the materials, a report is prepared and the first copy of such report is send to the purchase department, the second to the account department and the third to the department receiving the materials. The specimen of an inspection form is as under:
Materials inspection report, Materials inspection report form, Materials inspection report format, Materials inspection report photo
Before storing the materials, a statement of the materials received is prepared which is called the goods receipt note in which the code, price and quantity of the materials are mentioned.
Stores (goods) received note, Stores (goods) received note format, Stores (goods) received note photo

Passing bill for payment
This is the last process of a purchase procedure. The final approval for the bill of materials to be paid to the suppliers and eventually the account section makes payment of the same.

4. What do you mean by ABC analysis? Write any three advantages of ABC analysis.
ABC analysis is a way of categorizing the material on the basis of the quantity of consumption and their relative values' some materials might be consumed in lower quantities but their price may be very high. Such materials are kept in group 'A'. Similarly, some materials may be consumption in large quantities but their values may be lower. Such materials are kept in group 'C'. In between these two some materials may be concurred in moderate quantity within the moderate price. Such materials are kept in group 'B'. Under ABC analysis, very little control is excreted over the materials in group 'C'.
a. Strict control: under ABC analysis, strict control can be exercised to the materials in group 'A' that have higher value.
b. Reduction in investment: under ABC analysis, the materials from group 'A' are purchase in lower quintiles as much as possible with this, the effort to reduce the delivery period is possible. With this, effort to reduce the delivery period is also made. Those in turn help to reduce the investment in material.
c. Minimum storage cost: since the material from group 'A' are purchase in lower quantity as much as possible, it reduces the stories cost as well.
5. What do you mean by JIT? What are its advantages?
JIT rebus to process of acquires materials (inventory) as they are needs. JIT reduces inventory by purchase and storing lower quantity of inventory as much as possible. The objectiv3e of JIT is to maintain inventory as low as possible. Thus, under JIT, the inventory as low as possible thus, under JIT, the inventories are received in time or purchased inn time of use. It is only possible when the supplier can be relied for making the delivery of goods on time without compromising the quantity.
a. Just in time inventory system reduces the amount of money tied up in inventory of raw materials and finished goods.
b. This system creates saving of space.
c. It does not require maintaining large inventory storage facilities.
d. Just in time inventory system minimizes wastage.
e. It helps to improve the large labor efficiency.
6. What do you mean by perpetual inventory system? Write any three advantages of it.
The perpetual inventory system is the way of maintaining the record of inventory in such a ways that the stock on hard can be ascertained at any time. It emphasizes the day to day checking of stocks and maintains the update record. It is a method of recording inventory after every received and issue to facilities regular checking and obviate the stocktaking. It   provides the perfect stock control as we can easily find out and verify the level and position of stock lying in the store at any moment by physical counting.
The advantages of the perpetual inventory system are as follows:
a. Obviates the necessity of physical verification of all items: it obviates the necessary for the physical checking of all items of stores at the end of the year.
b. Easy to prepare final accounts: it is possible to prepare the profit and loss balance sheet without checking the inventory because the figure of closing stock can be taken from the bin card or store ledger.
c. Reliable check: perpetual inventory system is able to provide more reliable check on the ledger.
d. Easy to make claim with insurance company: perpetual inventory system provides correct stock figures for claim to be made with the insurance company for loss of stock destroyed by fire or others.
7. Mention the procedures of purchasing inventory.
Material is a major component for any organization since it affects the production, quality of products, price and sales, thus, a systematic process is developed for the purchase of materials. The department in the purchase of material is called the purchase department.
The purchase procedures are mentioned below:
a. Receiving purchase requisition
b. Selection of suppliers
c. Sending purchase order
d. Receiving and inspecting materials
e. Passing bill for payment.



Read More....

  1. Management accounting
  2. Cost accounting
  3. FINANCIAL ACCOUNTING
  4. Cost concept and classification
  5. Accounting error and their rectification
  6. Financial statement analysis
  7. Subsidiary Books Account
  8. balance sheet
  9. Final account of a company
  10. accounting worksheet
  11. Bank Reconciliation Statement
  12. FORFEITUERE AND RE-ISSUE OF SHARES
  13. Share Capital Accounting
  14. account company
  15. Accounting Reserve and Provisions 
  16. Depreciation for Accounting 
  17. profit and loss account
  18. Capital and revenue Account
  19. Journal Accounting
  20. Trial Balance Accounting
  21. Petty Cash Book
  22. Cash and Bank Transaction
  23. Ledger Account
  24. Journal Entry Accounting
  25. Accounting Equation
  26. Double Entry Book Keeping System 
  27.  accounting term used Account 
  28. Accounting Meaning
  29. Accounting- in information system
  30. Statement of expenditure report
  31. Petty cash fund
  32. Bank cash book/cash bank book
  33. Journal voucher
  34. Budget heads for the fiscal year
  35. budget head expenditure
  36. New accounting system
  37. Government accounting
  38. Accounting for incomplete records (single entry system
  39. Accounting for non- trading concern
  40. Cost reconciliation statement
  41. Unit or output costing
  42. Accounting for overheads 
  43. Payroll sheet
  44. Accounting for labor
  45. Inventory Management
  46. Issue of materials
  47. Store keeping
  48. Accounting for materials
  49. Cost classification
  50. Cash flow statement
  51. Funds flow statement
  52. Accounting Ratio analysis
  53. Accounting for Debentures
  54. ISSUE OF SHARES OTHER THAN CASH
  55. ISSUE OF SHARE FOR CASH
  56. Final Account 
  57. Accounting for labour

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