Which inventory classification method categorizes inventory based on its value and quantity?

The ABC Analysis is an inventory classification method that categorizes inventory based on the value and quantity of items. The premise behind this method is the Pareto principle, often referred to as the 80/20 rule, which suggests that a small percentage of items usually accounts for a large portion of the total inventory value.

In the context of ABC Analysis, inventory is divided into three categories:

• 'A' items are high-value, low-quantity items that require tight control.

• 'B' items are moderate-value and moderate-quantity, deserving of a moderate level of attention.

• 'C' items are low-value, high-quantity items that can be managed with a less stringent approach.

This classification enables businesses to prioritize their management efforts and resources effectively, ensuring that the most critical stock items receive the attention they require, both in terms of inventory management and financial investment.

The other methods provided, such as FIFO and LIFO, relate more to inventory valuation and flow assumptions rather than the categorization of inventory by value or quantity. Just-in-Time (JIT) Inventory is an inventory strategy aimed at reducing waste and improving efficiency, focusing on synchronizing production schedules with demand, rather than classifying inventory based on its characteristics.