Concept explainers
a. The following table contains figures on the monthly volume and unit costs for a random sample of 16 items from a list of 2,000 inventory items at a health care facility. Develop an A-B-C classification for these items.
b. Given the monthly usages in the following table, classify the items in A, B, and C categories according to dollar usage.
C. Determine the percentage of items in each category and the annual dollar value for each category for pan b.
a)
To determine: ABC classification for the items.
Introduction: Inventory is a stock or store of goods. Every company store lots of goods as inventory which will be used during replenishment periods. Management of inventory is so much essential to manage cost and also to reduce cost.
Answer to Problem 2P
Explanation of Solution
Given information:
Item | Unit Cost | Usage |
K34 | $10 | 200 |
K35 | 25 | 600 |
K36 | 36 | 150 |
M10 | 16 | 25 |
M20 | 20 | 80 |
Z45 | 80 | 200 |
F14 | 20 | 300 |
F95 | 30 | 800 |
F99 | 20 | 60 |
D45 | 10 | 550 |
D48 | 12 | 90 |
D52 | 15 | 110 |
D57 | 40 | 120 |
N08 | 30 | 40 |
P05 | 16 | 500 |
P09 | 10 | 30 |
Calculation for ABC classification:
Step 1: Calculation of annual dollar value
Item | Unit Cost | Usage | Annual dollar value |
K34 | $10 | 200 | $2,000 |
K35 | 25 | 600 | $15,000 |
K36 | 36 | 150 | $5,400 |
M10 | 16 | 25 | $400 |
M20 | 20 | 80 | $1,600 |
Z45 | 80 | 200 | $16,000 |
F14 | 20 | 300 | $6,000 |
F95 | 30 | 800 | $24,000 |
F99 | 20 | 60 | $1,200 |
D45 | 10 | 550 | $5,500 |
D48 | 12 | 90 | $1,080 |
D52 | 15 | 110 | $1,650 |
D57 | 40 | 120 | $4,800 |
N08 | 30 | 40 | $1,200 |
P05 | 16 | 500 | $8,000 |
P09 | 10 | 30 | $300 |
Total | $94,130 |
The annual dollar value is the product of unit cost and annual volume. For K34, the product of $10 and 200 gives $2,000 which is the dollar value for K34 and same procedure is followed for others items and the sum accounts to $94,130.
Step 2: Classification of items
Item | Unit Cost | Usage | Annual dollar value | Category | Percentage of items | Percentage of annual dollar value |
F95 | 30 | 800 | $24,000 | A | 18.75% | 58.43% |
Z45 | 80 | 200 | $16,000 | |||
K35 | 25 | 600 | $15,000 | |||
P05 | 16 | 500 | $8,000 | B | 31.25% | 31.55% |
F14 | 20 | 300 | $6,000 | |||
D45 | 10 | 550 | $5,500 | |||
K36 | 36 | 150 | $5,400 | |||
D57 | 40 | 120 | $4,800 | |||
K34 | $10 | 200 | $2,000 | C | 50.00% | 10.02% |
D52 | 15 | 110 | $1,650 | |||
M20 | 20 | 80 | $1,600 | |||
F99 | 20 | 60 | $1,200 | |||
N08 | 30 | 40 | $1,200 | |||
D48 | 12 | 90 | $1,080 | |||
M10 | 16 | 25 | $400 | |||
P09 | 10 | 30 | $300 | |||
Total | $94,130 |
Table 1
Excel Worksheet:
The items are classified based on their percentage of dollar value where 10-15% are classified as A items and 50% are classified as B items and lowest value are classified as C item which is shown in table 1.
Hence, ABC classification of items is shown in table 1.
b)
To determine:ABC classification for the items.
Introduction: Inventory is a stock or store of goods. Every company store lots of goods as inventory which will be used during replenishment periods. Management of inventory is so much essential to manage cost and also to reduce cost.
Answer to Problem 2P
Explanation of Solution
Item | Usage | Unit Cost |
4021 | 90 | $1,400 |
9402 | 300 | 12 |
4066 | 30 | 700 |
6500 | 150 | 20 |
9280 | 10 | 1,020 |
4050 | 80 | 140 |
6850 | 2,000 | 10 |
3010 | 400 | 20 |
4400 | 5,000 | 5 |
Given information:
Calculation for ABC classification:
Step 1: Calculation of annual dollar value
Item | Usage | Unit Cost | Annual dollar value |
4021 | 90 | $1,400 | $126,000 |
9402 | 300 | 12 | $3,600 |
4066 | 30 | 700 | $21,000 |
6500 | 150 | 20 | $3,000 |
9280 | 10 | 1,020 | $10,200 |
4050 | 80 | 140 | $11,200 |
6850 | 2,000 | 10 | $20,000 |
3010 | 400 | 20 | $8,000 |
4400 | 5,000 | 5 | $25,000 |
Total | $228,000 |
The annual dollar value is the product of unit cost and annual volume. For item 4021, the product of 90 and $1400 gives $126,000 which is the dollar value for item 4021 and same procedure is followed for others items and the sum accounts to $228,000.
Step 2: Classification of items:
Item | Usage | Unit Cost | Annual dollar value | Category | Percentage of items | Percentage of annual dollar value |
4021 | 90 | $1,400 | $126,000 | A | 11.11% | 55.26% |
4400 | 5,000 | 5 | $25,000 | B | 33.33% | 28.95% |
4066 | 30 | 700 | $21,000 | |||
6850 | 2,000 | 10 | $20,000 | |||
4050 | 80 | 140 | $11,200 | C | 55.56% | 15.79% |
9280 | 10 | 1,020 | $10,200 | |||
3010 | 400 | 20 | $8,000 | |||
9402 | 300 | 12 | $3,600 | |||
6500 | 150 | 20 | $3,000 | |||
Total | $228,000 |
Table 2
Excel Worksheet:
The items are classified based on their percentage of dollar value where 10-15% are classified as A items and 50% are classified as B items and lowest value are classified as C item which is shown in table 2.
Hence, ABC classification of items is shown in table 2.
c)
To determine: The percentage of items in each category and their respective annual dollar value.
Introduction: Inventory is a stock or store of goods. Every company store lots of goods as inventory which will be used during replenishment periods. Management of inventory is so much essential to manage cost and also to reduce cost.
Answer to Problem 2P
Explanation of Solution
Given information:
Item | Unit Cost | Usage |
K34 | $10 | 200 |
K35 | 25 | 600 |
K36 | 36 | 150 |
M10 | 16 | 25 |
M20 | 20 | 80 |
Z45 | 80 | 200 |
F14 | 20 | 300 |
F95 | 30 | 800 |
F99 | 20 | 60 |
D45 | 10 | 550 |
D48 | 12 | 90 |
D52 | 15 | 110 |
D57 | 40 | 120 |
N08 | 30 | 40 |
P05 | 16 | 500 |
P09 | 10 | 30 |
Percentage of items in each category and their respective annual dollar value:
The percentage of items in each category and their respective annual dollar values are computed and shown in the classification table which is table 2.
Hence, the percentage of items in each category and their respective annual dollar value is shown in table 2,
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