ABC analysis divides on-hand inventory into three classifications on the basis of annual dollar volume. (6.3 The Importance of Inventory)

Question

BlackTom AI · Accepted Answer

When we examine the claim about ABC analysis in inventory management, we start by restating what the method is designed to do.
Option a: False. This option asserts that the statement is untrue. However, in standard practice ABC analysis indeed divides on-hand inventory into three classifications, and the basis for this division is typically the annual dollar value (annual consumption value) of items, not merely physical quantity. The phrasing here would be incorrect if the basis were something else, but the common definition centers on dollar volume, so calling it false mischaracterizes the core criterion.
Option b: True. This option correctly states that ABC analysis classifies inventory into three categories—A, B, and C—according to annual dollar volume. Items in category A usually represent the largest share of dollar value but the smallest number of items, category B is intermediate, and category C comprises many items with the smallest individual dollar values. The underlying rationale aligns with the Pareto principle (roughly 80/20), where a small portion of items drive most of the value, which is the essence of why the ABC approach is used for prioritization and control. It's important to note that while the exact split (e.g., 70/20/10 or 80/15/5) can vary by organization, the three-category framework driven by annual dollar value remains the defining feature.

ABC analysis divides on-hand inventory into three classifications on the basis of annual dollar volume. (6.3 The Importance of Inventory)Single choice

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