ABC Analysis
Definition
A method of classifying inventory into categories A, B and C by value and importance, so management attention and controls focus on the small share of items that drive most of the value.
Related Terms in Purchasing & Inventory
Just-in-Time (JIT) Inventory
An approach that keeps inventory to a minimum by receiving goods only as they are needed for production or sale. It cuts carrying cost but relies on reliable suppliers and demand.
Net Realisable Value (NRV)
The estimated selling price of inventory less the costs to complete and sell it. Inventory is generally carried at the lower of cost and NRV, so a fall in NRV triggers a write-down.
Lower of Cost or Market
An inventory valuation rule requiring stock to be reported at the lower of its historical cost or its current market value, so that likely losses are recognised promptly.
Standard Costing
A method that assigns predetermined standard costs to products and then analyses the variances between standard and actual costs. It is widely used in manufacturing for control and pricing.
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