Learn about the ABC classification method, the most commonly used technique for inventory cycle counting. Find out how this method categorizes inventory and determines count frequencies.
Table of Contents
Question
Which of the following techniques is most commonly used for cycle counting of inventory?
A. Controlled sample
B. Occurrence of purchased order receipts
C. ABC classification
D. Product negative balance
Answer
The most commonly used technique for cycle counting of inventory is:
C. ABC classification
Explanation
ABC classification, also known as ABC analysis, is a method of categorizing inventory items into three groups – A, B, and C – based on their value and importance. This allows companies to focus their cycle counting efforts on the most critical items.
Here’s how it works:
- “A” items are the most valuable and important, typically making up a small percentage of total inventory but a large percentage of total value. These are counted most frequently, such as monthly.
- “B” items are of moderate value and importance. They are counted less often than A items, such as quarterly.
- “C” items are the least valuable and important, making up a large percentage of inventory but small percentage of value. They are counted least frequently, such as annually.
By concentrating efforts on the high-value A items that have the biggest impact, while spending less time on the lower-priority B and C items, ABC classification helps companies optimize their cycle counting process. It ensures the most important items are counted regularly for accuracy, while saving time and resources on less critical items.
The other options are less commonly used for cycle counting:
- Controlled sample: Randomly selecting a sample of items to count
- Occurrence of purchased order receipts: Counting items when purchase orders are received
- Product negative balance: Counting items when their recorded quantity falls below zero
So in summary, ABC classification, by categorizing inventory based on value and counting higher-value items more frequently, is the most common and effective technique for inventory cycle counting.
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