5. All of the following statements about ABC analysis are true except:
A. Inventory may be categorized by measures other than dollar volume
B. It categorizes on-hand inventory into 3 groups based on dollar volume
C. It is an application of the Pareto Principle.
D. It states that all items require the same degree of control
E. It states that there are the critical few and the trivial many inventory items
Based on the research I did, I found support for both B,C, and E. Therefore, I think that both A and D could be correct because (a) ABC is based on annual dollar volume and (d) ABC states that C items require less control than A and B items. However, only one can be the correct answer.
Therefore, I would say that the correct answer is D.
To determine the correct answer, let's analyze each option.
A. Inventory may be categorized by measures other than dollar volume.
Explanation: This statement is true. While dollar volume is commonly used to categorize inventory in ABC analysis, other measures such as unit sales, unit cost, or profitability can also be used.
B. It categorizes on-hand inventory into 3 groups based on dollar volume.
Explanation: This statement is true. ABC analysis categorizes inventory into three groups: A, B, and C. Group A contains high-value items with high dollar volume, Group B contains moderate-value items, and Group C contains low-value items with low dollar volume.
C. It is an application of the Pareto Principle.
Explanation: This statement is true. ABC analysis is based on the Pareto Principle, which states that a significant majority of effects come from a minority of causes. In this case, it means that a significant percentage of inventory value is concentrated in a small percentage of items.
D. It states that all items require the same degree of control.
Explanation: This statement is false. ABC analysis classifies items into different groups based on their value or importance. The primary objective is to allocate resources and control efforts based on the relative importance of items. Hence, different levels of control are applied to each group.
E. It states that there are the critical few and the trivial many inventory items.
Explanation: This statement is true. ABC analysis differentiates between critical few items (Group A) that represent a significant portion of inventory value and require higher control, and trivial many items (Group C) with lower value and control requirements.
Based on the explanations above, the only statement that is NOT true is:
D. It states that all items require the same degree of control.
Thus, the correct answer is option D.
The correct answer is D. It states that all items require the same degree of control.
ABC analysis categorizes on-hand inventory into three groups based on dollar volume, with higher value items classified as A items, moderate value items classified as B items, and lower value items classified as C items. This categorization is an application of the Pareto Principle, which states that a small number of items contribute the majority of the value or impact. Therefore, statement B and C are both true.
However, ABC analysis does not state that all items require the same degree of control. In fact, ABC analysis recognizes that different categories of items require different levels of control. A items, being high-value items, typically require tighter control and more frequent monitoring, while C items, being low-value items, require less control. Therefore, statement D is false.
Statement A is true because ABC analysis can categorize inventory by other measures besides dollar volume, such as unit sales volume or profit margin.
Therefore, the correct answer is D.