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CMA Intermediate · Financial Management and Business Data Analytics · Inventory Management

A data analyst at Rao Traders wants to apply ABC analysis on a table of 2,000 SKUs with annual usage quantity and unit cost. Which sequence of steps is correct?

The correct sequence is to compute annual consumption value (usage times unit cost) for each SKU, sort descending, compute cumulative percentage of value, and then assign A, B and C bands using cut-offs. Other sorting bases do not reflect consumption value.

  1. ACompute annual consumption value per SKU, sort in descending order, compute cumulative percentage, then assign A, B and C bandsCorrect
  2. BSort SKUs by unit cost ascending, compute average usage, then assign bands by item count
  3. CCompute order quantity per SKU, sort alphabetically, then assign bands equally into three groups
  4. DCompute lead time per SKU, sort by lead time, then assign bands by supplier

Explanation

ABC analysis is based on annual consumption value = annual usage x unit cost. Items are sorted in descending order of value, cumulative percentages are computed, and cut-offs define A, B and C. Sorting by unit cost or lead time ignores consumption value.

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