ABC inventory system

The ABC inventory system is different from activity-based costing. The ABC inventory system is used in order to focus on the most important items in inventory. Usually a relatively few items will account for a very significant value. These relatively few items with great importance are categorized as the "A" items. It is also common for many of the items in inventory to have a relatively small aggregate value. These items are categorized as "C" items. The remaining items are categorized as the "B" items. By closely monitoring the "A" items, a company is able to manage the most important items with a relatively small effort.

The ABC inventory system classifies inventory into A, B, and C categories based on value/importance. “A” items are few but high value and require tight control; “C” items are many but low value.

- Used in product/service costing, budgeting, and variance analysis.
- Used to support pricing decisions and profitability analysis by cost behavior and drivers.

- Example: The costing team uses **ABC inventory system** to allocate costs and analyze margins by product line.

- Why it matters: Improves cost accuracy, supports better pricing and budgeting, and strengthens performance measurement.