Inventory ABC Analysis — Complete User Guide — Two Accounts Web

Comprehensive guide for the Inventory ABC Analysis report — enabling it, creating the report, reading every column, and validating each figure against the General Ledger inventory postings and accounting regulations

Table of Contents

1. What Is the Inventory ABC Analysis Report?
2. Prerequisites — Enabling via the Customize Menu
3. Navigating to the Report
4. The Report List
5. Creating the Report — Field-by-Field
   • 5.1 From Date and To Date
   • 5.2 Description
   • 5.3 Class A Percentage
   • 5.4 Class B Percentage
6. Report Output Columns
7. How the Report Is Calculated
   • 7.1 Source of the Data
   • 7.2 Quantity Owned
   • 7.3 Total Cost and Unit Cost
   • 7.4 Sorting and Percentages
   • 7.5 Cumulative Percentage and Classification
   • 7.6 Total Row
8. Related Settings and Configuration
9. Sample Data and Report Output
   • 9.1 Sample Setup
   • 9.2 Creating the Report
   • 9.3 Report Output
   • 9.4 Calculation Verification
10. General Ledger Verification
11. Reporting and Accounting Impact
12. Accounting Regulation Validation
13. Common Issues and Best Practices

1. What Is the Inventory ABC Analysis Report?

The Inventory ABC Analysis report is a classic management-accounting control tool. It ranks every inventory item by the value of its stock held during a period, and then assigns each item to one of three classes using the well-known Pareto (80/20) principle:

• Class A — the small number of items that make up the largest share of inventory value (typically the top ~80% of value). These are the high-value items that deserve the tightest control.
• Class B — the next group of items (typically the next ~15% of value). Moderate control.
• Class C — the many low-value items that make up the smallest share of value (the remaining ~5%). Lighter, simpler control.

For every item the report shows the quantity owned, the unit cost, the total cost, the item's percentage of total inventory value, and the cumulative percentage. Items are sorted from the most valuable to the least valuable, so the A-class items appear at the top of the list.

Like most reports here, it is a saved report: you choose a period once, save it, and reopen it any time. The output is printable, emailable, and exportable.

2. Prerequisites — Enabling via the Customize Menu

The report appears under Reports only when the Inventory Items tab is enabled for the business. Inventory Items is not enabled by default.

How to Enable

1. Open the Customize Menu from the navigation bar.
2. Find the Inventory Items toggle and turn it on.
3. Click Update / Save to apply.

Once enabled, the report is available under Reports → Inventory Items → Inventory ABC Analysis.

3. Navigating to the Report

From the main navigation bar:

1. Open Reports.
2. Go to the Inventory Items category.
3. Click Inventory ABC Analysis.

This opens the report list — every saved ABC Analysis report for the business appears here, sorted by its From Date (newest first).

4. The Report List

The list shows one row per saved report, with three columns:

Each row is clickable:

• Click the row to open the report output (the ABC classification table).
• Edit opens the report form to change the period, description, or thresholds.

A New Report button at the top creates a fresh report.

5. Creating the Report — Field-by-Field

Click New Report to open the report form. It contains four fields:

5.1 From Date and To Date

5.2 Description

5.3 Class A Percentage

5.4 Class B Percentage

6. Report Output Columns

The report opens with a subtitle:

For the period from {From Date} to {To Date}

The table reads one row per inventory item (items are listed from the highest total value to the lowest). The columns are:

7. How the Report Is Calculated

7.1 Source of the Data

The report is built from the business's General Ledger. It selects every ledger line that:

• is posted to an inventory on-hand account,
• is linked to an inventory item, and
• is dated within the report's inclusive From–To range.

Before reading, the ledger is processed through the same cost-of-goods-sold calculation used by the standard financial statements, so the inventory values reflect the correct COGS allocations.

7.2 Quantity Owned

Qty owned (per item) = sum of the item's inventory on-hand GL quantities,
   counting only lines that are genuine ledger transactions,
   excluding automatic cost-of-goods-sold sales lines,
   and only where a non-zero quantity is recorded.

• Purchases/imports increase the quantity; sales and adjustments reduce it (their COGS lines are excluded so sales do not inflate the "owned" figure).
• Lines with a blank or zero quantity are skipped for the quantity count.

7.3 Total Cost and Unit Cost

Total cost (per item) = sum of the item's inventory on-hand GL amounts
   counting only genuine ledger transactions,
   excluding automatic cost-of-goods-sold sales lines.

Unit cost = Total cost ÷ absolute value of Quantity owned
            (rounded to the base currency's decimal places)

• For purchased goods this includes the full unit cost recorded in the cost layers — the purchase price plus any directly attributable costs, as capitalised by the system's costing engine.
• The absolute quantity is used so a negative quantity still yields a meaningful (positive) unit cost.

7.4 Sorting and Percentages

Items are sorted by Total cost, from highest to lowest. Then, for each item in that order:

% of Total        = round( item Total cost ÷ total value of all items × 100 , 2 )
Cumulative %      = round( running total of costs ÷ total value × 100 , 2 )

Both percentages are rounded to 2 decimal places using half-away-from-zero rounding. The Cumulative % is the running total of the item costs as you go down the list, divided by the total value — it is computed from the raw cumulative cost, not by adding the rounded per-item percentages.

7.5 Cumulative Percentage and Classification

Each item's class is decided by its Cumulative % against your saved thresholds:

Class A  if  Cumulative %  ≤  Class A Percentage            (default 80)
Class B  if  Cumulative %  ≤  Class A Percentage + Class B Percentage  (default 95)
Class C  otherwise

7.6 Total Row

A Total row at the bottom sums the numeric columns: the total quantity owned, the total cost, and the sum of unit costs. The ABC Class, % of Total, and Cumulative % columns are not totalled (percentages and class labels are not meaningful as sums).

8. Related Settings and Configuration

9. Sample Data and Report Output

9.1 Sample Setup

Business settings

Transactions

Inventory items and their walkthrough on-hand position

Unit costs (computed by the report from the walkthrough layers):

Widget-X    = 1,000 ÷   75 = 13.333…  → 13.33
Gadget-Y    = 1,890 ÷   90 = 21.000   → 21.00
Component-Z = 3,000 ÷  100 = 30.000   → 30.00

9.2 Creating the Report

From Reports → Inventory Items → Inventory ABC Analysis, click New Report and enter:

9.3 Report Output

For the period from {From Date} to {To Date}

9.4 Calculation Verification

Total inventory value:

Total value = 3,000 + 1,890 + 1,000 = 5,890

Per-item percentages and classes (sorted by total cost, descending):

Component-Z:
  % of Total     = 3,000 / 5,890 × 100 = 50.93  ✓
  Cumulative %   = 3,000 / 5,890 × 100 = 50.93   ✓
  Class          = 50.93 ≤ 80  → A                        ✓

Gadget-Y:
  % of Total     = 1,890 / 5,890 × 100 = 32.09  ✓
  Cumulative %   = 4,890 / 5,890 × 100 = 83.02   ✓
  Class          = 83.02 ≤ 95  → B                       ✓

Widget-X:
  % of Total     = 1,000 / 5,890 × 100 = 16.98  ✓
  Cumulative %   = 5,890 / 5,890 × 100 = 100.00  ✓
  Class          = 100.00 > 95  → C                      ✓

Unit costs:

Widget-X    = 1,000 ÷   75 = 13.33   ✓
Gadget-Y    = 1,890 ÷   90 = 21.00   ✓
Component-Z = 3,000 ÷  100 = 30.00   ✓

Total row:

Qty owned  = 100 + 90 + 75   = 265        ✓
Total cost = 3,000 + 1,890 + 1,000 = 5,890  ✓

10. General Ledger Verification

Every figure in the report is a sum of General Ledger inventory on-hand postings. Those postings are:

Purchases (InventoryOnHand):
  Widget-X    100 @ 10 = 1,000 ;  100 @ 12 = 1,200 ;  50 @ 14 = 700
  Gadget-Y    100 @ 20 = 2,000 ;  100 @ 22 = 2,200
  Component-Z 100 @ 30 = 3,000 ;  100 @ 32 = 3,200 ;  50 @ 34 = 1,700

Sales consume the layers (COGS):
  Widget-X    T7 = 1,600 ; T11 = 360 ; T14 (write-off) = 60 ; T17 (return) = −120  → net 1,900
  Gadget-Y    T8 = 1,050 ; T12 = 1,260                                             → net 2,310
  Component-Z T18 (periodic, LIFO) = 4,900
 
Ending on-hand (InventoryOnHand):
  Widget-X    75 units = 1,000     Gadget-Y  90 units = 1,890     Component-Z  100 units = 3,000

How each report column maps to the GL:

Cross-check with the walkthrough's Inventory Items List View / Balance Sheet:

InventoryOnHand (Widget-X)      1,000
InventoryOnHand (Gadget-Y)      1,890
InventoryOnHand (Component-Z)   3,000
                            ────────────
Total InventoryOnHand           5,890   ✓

11. Reporting and Accounting Impact

• Balance Sheet: The report's Total cost per item reconciles to the inventory on-hand account on the Balance Sheet. The grand total (5,890 in the sample) equals the inventory balance carried for those items.
• Profit & Loss: The report does not itself affect the P&L — but by ranking stock value it supports decisions (discontinuation, discounting, write-downs) that later flow through COGS and write-off entries.
• Inventory control: Class A items justify frequent cycle counting and tight purchasing control; Class C items justify simpler, cheaper controls. This directly supports lower holding costs and better cash flow.
• Cash-flow planning: Knowing where value is concentrated lets management reduce slow-moving high-value stock — the classic benefit of ABC analysis.
• Valuation cross-check: Because the figures come from the GL (via the COGS calculation), the report doubles as an independent check on the inventory valuation reports.

12. Accounting Regulation Validation

13. Common Issues and Best Practices

13.1 The Report Does Not Appear

Cause: The Inventory Items tab is not enabled, or the user lacks report permission.

Solution: Enable Inventory Items in the Customize Menu, or ask the administrator to grant report access.

13.2 The Report Body Is Empty

Cause: No inventory on-hand postings exist within the selected period (no purchases, imports, sales, or adjustments for any item).

Solution: Widen the date range, or confirm stock movement was recorded in the period.

13.3 Only One or Two Classes Appear (e.g. only A and C)

Cause: The items' values are so concentrated that the cumulative percentage jumps straight past the Class B band.

Solution: This is expected behaviour, not an error — with the default thresholds, the class bands are driven by cumulative value. If you want a finer split, adjust the Class A / Class B percentages on the report.

13.4 An Item's Cost Looks Different From Its Purchase Price

Cause: The report shows the item's cost-layer value (the cumulative cost of the layers on hand), not a single purchase price. Different layers carry different unit costs — e.g. in the walkthrough Widget-X has layers at 10, 12 and 14, giving a blended on-hand unit cost of 13.33.

Solution: Remember the total cost reflects the layers actually on hand (per the item's FIFO / Moving Average / LIFO method), which is the correct inventory valuation.

13.5 Unit Cost Uses the Absolute Quantity

Explanation: The report divides total cost by the absolute value of quantity owned, so a negative quantity (net out-shipment) still produces a meaningful positive unit cost.

13.6 Amounts Look Different From the Point-in-Time Stock Reports

Cause: ABC Analysis is movement-based for the selected period, while the Inventory Value / Valuation reports may show balances as at a date.

Solution: Choose the report that matches your question: period-movement ranking (ABC) vs point-in-time stock value (Inventory Value Summary).

Best Practices

• Run ABC over a full purchase/import period (e.g. monthly or quarterly) so the ranking reflects a complete stock cycle.
• Use the default 80 / 15 thresholds for a standard Pareto split; tune them only if your product mix warrants it.
• Cross-check the Total cost against the Balance Sheet inventory account for the same period.
• Use Class A as your cycle-count priority — highest value, most frequent counting.
• Give each saved report a clear Description (e.g. "Q1 2026 Stock Value") so the saved list is easy to navigate.
• Review Class A items for slow movers — they carry the most cash and are the first candidates for an NRV review.

End of Inventory ABC Analysis Guide