Specific Identification Method What Is It, Formula, Example

The specific identification inventory method is an inventory costing approach where each item of inventory is tracked and valued individually. Rather than averaging out costs or using estimates, businesses monitor the exact cost of each specific item. This eliminates the use of inventory layering or weighted averaging, which are quite common when large numbers of the same items are stored on the premises. The specific identification method is useful and usable when a company is able to identify, mark, and track each item or unit in its inventory. The specific identification inventory method is one of the available methods used in inventory management.

For every item selected, maintain a detailed record of its purchase date, cost, and any other relevant details. Using such an automated mechanism the company can quickly and accurately value its inventory which can include thousands of items. This method is more expensive to put into practice compared to alternate methods where items are grouped together. This method provides a precise valuation of inventory, and so makes the balance sheet more accurate. Can provide precise information on stock levels, money “stuck” in inventory, how long products are staying in inventory, which ones are staying longer than others, etc. At the end of a fiscal period (eg a quarter), the cost of an item that remains in inventory is added to the value of the ending inventory.

Another major disadvantage of the specific identification accounting methods is that it is very time-consuming to track inventory on a per unit basis, which restricts the methods to smaller quantities of inventory. The financial concept of specific identification method of inventory valuation has some advantages, as given below. In theory, this method is considered the most accurate since it directly relates the ending inventory goods to the specific price they were bought for. However, it also presents a loophole for management to manipulate the ending inventory cost. They can choose to report that the cheaper goods were sold first, thereby inflating the ending inventory cost and reducing the cost of goods sold, consequently boosting income. Alternatively, management could choose to report lower income to reduce the taxes they are required to pay.

In this article, we will study the Specific Identification Method of Inventory Valuation. Inventory is an asset on the company’s balance sheet and so needs to be properly valued. Inventory Valuation is the process of putting a value on the inventory that is being held by a business.

1. This method of identification allows investors to reduce or offset capital gains by picking a specific lot of securities to be used as the basis for a sale.
2. When this information is found, the amount of goods is multiplied by their purchase cost at their purchase date to get a number for the ending inventory cost.
3. However, it is to be noted that it is not the case that all manufacturers or business will use this method based on the nature or complexity of stockpile.
4. Choose CFI for unparalleled industry expertise and hands-on learning that prepares you for real-world success.

This information is then uploaded to the product database, where the inventory software correlates each bar code against a product name and value. A jewelry store carries necklaces, earrings, pendants, rings and other expensive jewelry made from diamonds, emeralds, rubies, sapphires and other precious stones. In the same way, the Specific Identification Method can also be used to calculate excess inventory.

Advantages of the Specific Identification Method

The chances of losing or misplacing inventory under such a system are almost obliterated because of its accuracy. The specific identification method is used to track individual items of inventory. This method is applicable when individual items can be clearly identified, such as with a serial number, stamped receipt date, bar code, or RFID tag.

What Is the Specific Identification Inventory Method?

But it could be very useful to a seller of a wide variety of merchandise who wants a steady stream of information on what products or styles are in demand, what’s not selling, and what needs restocking. This includes the cost of acquisition (eg purchase cost) of the item but also other costs while the item is in the inventory (eg maintenance cost). You don’t have to worry about matching the number of units from this sale to different purchases because each unit has a cost assigned to it. Once the cream of the crop, fresh-cut grass sold just three units on our example day. After the sale, adjust the total inventory value by deducting the cost of the sold item.

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Other methods of determining inventory movements included FIFO (first in first out), the LIFO (last in first out), and the average cost method. However, specific identification is a great tool in certain limited situations.

Overview: What is the specific identification method?

The average cost and LIFO methods were designed for tracking homogenous goods (think 20,000 units of the same white shirt, or 150 rolls of the same size paper). If you sell heterogeneous items that can’t be counted together, specific identification is probably the best way to manage inventory. For Jose’s business, one of the more common methods of inventory management, such as weighted average cost, wouldn’t be applicable. The weighted average cost formula would use units 851, 852, and 853 to come up with an average cost for the sale of 851. Studying the advantages and disadvantages of a financial concept like specific identification method stock sales is necessary in order to have a clear idea about it. This helps us to identify the situations or businesses where such methods and concepts can be implemented in a profitable and optimum manner.

At tax time, using the method described above, the investor can easily pros and cons of being a bookkeeper match up the shares sold for $70 with the most expensive of the shares purchased (for $60 per share). This method is rarely used because there are few purchased products with unique identification codes that are clearly recorded in a company’s accounting records. They needed to use the specific identification inventory method to accurately track and value the unique pieces of art they acquire. If you run an HVAC servicing business and sell used appliances every once in a while, you should probably use specific identification. If you make custom motorcycles that are unique, you should probably use specific identification.

Since the calculation of specific identification method of inventory valuation requires a lot of details about the inventory, it may not be suitable for all businesses. A company that might use the specific identification method would be a business that sells fine watches or an art gallery. The specific identification inventory method is a meticulous approach best suited for businesses dealing with unique items. We hope you now have a better understanding of the specific identification inventory method and how to implement it.

In the context of inventory valuation, the specific identification inventory method presents several advantages and disadvantages. In this article, we explain how the specific identification inventory method works and explore its advantages and disadvantages. We also provide a simple 5-step framework for implementing it, with real-world examples.

If it suits your business, you probably realized that the minute you started reading this article. Let’s take a look at a few examples of the specific identification method and compare its results to those we’d achieve by using other methods. Say an investor owns 1,000 shares of ABC company, a volatile small-cap manufacturer. It includes 400 shares purchased for $40 per share, 300 shares at $60 per share, and the remaining 300 shares at $20 per share. Obviously, this inventory method takes more work upfront than the alternatives. It might manual journals in xero not be a reasonable use of time for a seller of t-shirts or candles.