Which statement about ABC analysis is correct?

• A. ABC analysis sorts items by supplier rating.
• B. ABC analysis determines storage temperature categories.
• C. ABC analysis is about budget approvals.
• D. ABC analysis classifies items by annual consumption value into A high value, B moderate, C low.

Answer: (D)

ABC analysis focuses on how much value each inventory item represents in annual consumption. It ranks items by their annual consumption value (unit cost times annual usage) and splits them into three groups: high-value items, medium-value items, and low-value items. The goal is to concentrate management effort on the small set of high-value items, which typically drive the majority of the total value, while applying simpler controls to the low-value items.

That is why the statement describing ABC analysis as classifying items by annual consumption value into high, moderate, and low is correct. The other descriptions don’t fit because ABC analysis isn’t about supplier ratings, storage temperature categories, or budget approvals.