What is the ABC method of inventory?

The ABC method of inventory is a stock classification system that divides items into three priority tiers (A, B, and C) based on their relative value or contribution to the business.

The method applies the Pareto principle: a small percentage of items typically drives the majority of total inventory value. The three tiers generally break down as follows:

• A items are the highest-value SKUs, typically around 20% of items but contributing roughly 80% of total inventory value. These receive the tightest controls, most frequent cycle counts, and closest replenishment monitoring.
• B items are mid-range in value, often around 30% of SKUs and contributing about 15% of value. They receive moderate oversight.
• C items are the most numerous but least valuable, often making up 50% of SKUs while contributing only about 5% of total value. These are managed with lighter-touch controls.

The exact percentages are not fixed. Businesses set their own cutoffs based on revenue contribution, turnover rate, demand patterns, or other relevant criteria.

In retail inventory valuation, ABC analysis is a management and control tool rather than an accounting method like FIFO or weighted average cost. Its primary role is helping businesses direct resources toward the stock that matters most financially. When a formal inventory appraisal is required for lending, financial reporting, or liquidation, ABC classification can support the process by identifying which portions of stock warrant the closest scrutiny and documentation.