UGC NET Study Notes on ABC, VED, FSN Analysis || Commerce || Management

ABC ANALYSIS

Always Better Control technique, popularly known as ABC analysis is a method of inventory control based on the relative economic importance of different categories materials used by the entity. This method is based on the principle that the extent of control to be based on the cost of the component of inventory. Under this method, materials are classified into A, B, and C on their values (cost per unit)

‘A’ Category: - Materials very costly and of small quantity

‘B’ Category: - Materials of average value and medium quantity

‘C’ Category: - Materials of small value and bulk quantity

For Category ‘A’ items greater control and care is needed, while ‘B’ requires moderate control and ‘C’ needs comparatively low care and control.

Advantages of ABC Analysis :-

• Minimize investment in inventory because of better control adopted for ‘A’ category items identified with high values.
• Low carrying cost: - Carrying cost in the form of warehousing cost, cost of investment in inventory loss of obsolescence etc. are related to the value of the component. Because of exercising increased control of ‘A’ and ‘B’ categories the carrying cost can be minimized.
• High material turnover can be attained: - because of low quantity of component ‘A’ maintained in the store as stock, the entity can assure high material turnover ratio.
• Better control over costly items

VED Analysis

Vital Essential and Desirable analysis known as VED analysis is an inventory control techniques used for controlling spare parts in an organization. On the basis of the relative importance, spare parts may be classified into vital, essential and desirable

Vital: - Vital spare parts are those items of spare parts, the non – availability may lead to stoppage of production.

Essential: - Production may not be interrupted due to non-availability for few hours beyond which the production may be stopped because of non-availability

Desirable: - are those components which are needed for completing the production process, but their absences for a short period will not lead to stoppage of production.

Advantage of VED Analysis

• Selective control over spare parts.
• Ensure smooth processing.
• Avoid unnecessary locking up of capital in lesser important items represented by desirable components.
• Avoid loss due to obsolesce because of low stocking of desirable components ensure uninterrupted production because of stocking it vital and essential components.

FSN Analysis

This method of inventory control is adopted by an entity through the categorization of items of material on the basis of their speed of movement from the store to the factory.

Fast Moving: - are those items very speedily consumed in the production process and are to be replenished frequently.

Slow Moving: - are those components which are not frequently required for consumption in the production process and are not to be replenished frequently.

Non Moving: - are those components which are needed for production once or twice in a year. The surplus of such items found after usage is to be disposed immediately to avoid carrying cost. The loss if any on disposal is treated as factory overheads.

Advantage of FSN Analysis

• Avoid unnecessary locking up of capital in inventory of nonmoving and slow moving items.
• Avoid loss due to obsolescence.
• Uninterrupted production because of keeping sufficient inventory of fast moving components.

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