Lakein’s ABC Method Pros and Cons
Advantages
Better Control of High-Priority Inventory
ABC inventory analysis offers a distinct advantage by allowing for tighter and more frequent control of high-priority inventory, often called class A inventory. Class A inventory represents the items that customers request most frequently. In manufacturing, it can also include items crucial for production.
Since class A inventory directly impacts a company’s success, monitoring and managing its demand and stock levels is vital. ABC analysis enables companies to allocate resources strategically, prioritizing controlling and managing high-priority inventory over items with a lower impact on profitability.
More Efficient Cycle Counts
The ABC inventory analysis method enhances the efficiency of employees’ cycle counts. Cycle counting involves the employees periodically counting specific items on scheduled dates. The frequency, schedule and selection of items for cycle counts depend on how inventory fluctuates.
By classifying inventory into ABC categories, you can streamline cycle counts by focusing primarily on class A inventory. This means you may need to count class B inventory less frequently, perhaps only twice a year, and class C inventory just once annually. ABC analysis saves time and labour by counting only the necessary inventory items during each cycle rather than counting all items every time.
Disadvantages
Conflict with Other Cost Systems
One notable disadvantage of the ABC inventory analysis is that it doesn’t align with Generally Accepted Accounting Principles (GAAP) requirements and can conflict with traditional costing systems.
Businesses employing ABC methods often need to maintain two separate costing systems: one for internal use based on the ABC approach and another for GAAP compliance. Traditional costing systems are designed to generate figures that adhere to GAAP standards.
They allocate cost drivers according to actual unit costs rather than activity percentages of cost drivers. Consequently, ABC cost assignments often differ from those in traditional cost systems.
Requires Substantial Resources
Implementing the ABC method demands more resources than traditional costing systems. It involves ongoing analysis of class A inventory during cycle counts to assess whether these items still qualify as high-priority.
If an inventory item is no longer in high demand or frequently used, it must be reclassified into another category. This ongoing process necessitates extensive data measurement and collection, which can be resource and time-intensive.
