Which of the following statements about ABC analysis is FALSE?

Which of the following statements about ABC analysis is FALSE?

  • A. ABC analysis is based on the presumption that all items must be tightly controlled to produce important cost savings.
  • B. Criteria other than annual dollar volume, such as high holding cost or delivery problems, can determine item classification in ABC analysis.
  • C. ABC analysis is based on the presumption that controlling the few most important items produces the vast majority of inventory savings.
  • D. In ABC analysis, forecasting methods for “C” items may be less sophisticated than for “A” items.
  • E. In ABC analysis, “A” items should have tighter physical inventory control than “B” or “C” items have.

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Explanation

A technique for valuing inventory in a business is ABC analysis. Things in categories “A” and “B” are of the highest value, whereas items in categories “C” are of lesser worth. The Pareto principle, which states that 80% of consumption depends on 20% of the most valuable goods, is the foundation of the ABC analysis. In this situation:

Items of “A” quality (20% value): supply 80% of consumption
Items in the “B” category (30% value): 15% of consumption
5% of consumption is provided by “C” goods (50% value).
As a result, the cost of commodities within an entity has nothing to do with ABC analysis.

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Correct answer is option A. ABC analysis is based on the presumption that all items must be tightly controlled to produce important cost savings.