What Is ABC Analysis?
Ask an Indian business owner which items matter most and you usually hear about the ones that sell the fastest.
ABC analysis sorts every item you stock into three classes by the money tied up in it over a year, so the handful carrying most of your cash gets most of your attention. Class A is the small group holding most of the value. Class C is the many items holding very little. Class B sits in between. How often something sells does not come into it.
How the Three Classes Are Set
Start with one figure per item, worked out over a full year rather than a busy month:
Annual consumption value = annual usage quantity x unit cost
Rank every item by that number, highest first. Add the values downwards and watch the running share of the total. Where that share crosses your first cut is where class A ends.
No rule fixes those cuts. Splits of 70, 20 and 10 per cent of value are common, and so are 80, 15 and 5. Pick the one that matches how much attention you can genuinely give, because a class A list of ninety items is the same as having no list.
Two things break the exercise:
- Selling price instead of cost. It inflates the fast movers and pushes cheap best-sellers into class A.
- One quarter instead of a year. It lets a seasonal item masquerade as class A.
Pulling a clean year of usage is the real work here. It rests on consumption tracking, which our rundown of inventory system features walks through.
ABC vs FSN Analysis
This is where the two get mixed up, because both sort the same shelf and neither answers the other’s question.
| Aspect | ABC | FSN |
|---|---|---|
| Ranks by | Money tied up | How often it moves |
| Built from | Usage and cost | Issue frequency |
| Answers | Where cash sits | What is going stale |
| Blind spot | Slow costly stock | Cheap fast movers |
An item can be class A and barely move. A pallet of inverter batteries that turns twice a year is still class A, because the cash is sitting in it either way. Inventory turnover would call that pallet slow, while ABC calls it important.
Run both cuts and the overlap is what deserves a hard look: fast and expensive gets watched weekly, slow and expensive gets questioned.
ABC Analysis Example
An electrical goods distributor in Bardhaman ranks six lines by what each consumed over the year to March 2026.
| Item | Annual value | Class |
|---|---|---|
| Batteries | Rs.18,40,000 | A |
| Copper wire | Rs.9,60,000 | A |
| LED panels | Rs.3,20,000 | B |
| Switches | Rs.1,45,000 | B |
| Fuses | Rs.48,000 | C |
| Tape | Rs.27,000 | C |
Note: this is an invented example for illustration only. Your own classes depend on your cost prices and a full year of usage.
The six lines come to Rs.33,40,000. Two of them carry Rs.28,00,000, or 84 per cent of the money, and the bottom two carry 2 per cent between them. Tape and fuses leave the shelf far more often than batteries do, and that is the point: frequency had no say in where they landed. On a catalogue of three hundred lines the A group would be a far thinner slice than two in six.
Where the Counting Effort Should Go
Nobody counts everything every week. Class A earns a monthly count, class B a quarterly one and class C an annual one, so the effort follows the money rather than the shelf space.
That habit has a legal echo for larger businesses, though not the one you would expect. Under CARO 2020 an auditor must report any discrepancy of 10 per cent or more, measured in value after excesses and shortages inside a class cancel out, for each class of inventory.
Those classes are the AS 2 ones: raw materials, work in progress, finished goods, stores and spares. They are not your A, B and C bands, so do not expect the two to line up. The order also skips proprietorships, partnerships, one person companies and small companies, which puts most single-outlet businesses outside it. What carries across is the habit, not the labels.
An inventory audit checklist will set the count rhythm, and our guide to inventory audits covers the rest.
See Where Your Stock Money Sits
Every class is built from three numbers: what you bought, what it cost and what got used. A till and a purchase record already hold all three.
For retail businesses, Petpooja Invoice carries Inventory Management & Stock Transfer and Warehouse Management, so usage and cost sit in one place instead of three.
For restaurants, Petpooja POSS tracks inventory consumption with item-wise auto deduction and day-end inventory reports, which is the usage side of the formula.
A ranking is only as honest as the year behind it. Have a look at what twelve months of your own consumption would put at the top.
Frequently Asked Questions
ABC ranks items by the money tied up in them; FSN ranks them by how often they move. An expensive item that sells twice a year is class A under ABC and slow-moving under FSN, and both readings are correct.
Multiply each item’s annual usage by its unit cost, rank the list highest first, then add the values downwards until the running share of total value crosses your cut. Everything above the first cut is class A.
There is no fixed split. Most businesses put roughly 70 to 80 per cent of value in class A and the last 5 to 10 per cent in class C, then adjust once they see how many items each class actually contains.
Yes, and it matters more there. With less cash to spare, knowing which six or seven lines hold most of your working capital changes what you reorder first when money is tight.
