Specific Identification Method Pros & Cons with Examples

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The primary drawback to the specific identification method is that its use requires a definitive ability to easily and consistently identify all the individual items within a company’s inventory, track their cost, and produce them upon sale or the promise of sale. The specific identification inventory valuation method is a system for tracking every single item in an inventory individually from the time it enters the inventory until the time it leaves it. This distinguishes the method from LIFO or FIFO, which groups pieces of inventory together based on when they were purchased and how much they cost. Similarly, FOB destination means the seller transfers title and responsibility to the buyer at the destination, so the seller would owe the shipping costs.

How would you approach the subject of whether the company should consider switching to computerized perpetual inventory updating? The specific identification method introduces a high degree of accuracy to the cost of inventory, since the exact cost at which something was purchased can be recorded in the inventory records, and charged to the cost of goods sold when the related item is sold. 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. Using the specific identification method of inventory valuation, the business records ending inventory of 23 units as being from the following purchases, January 9, 1 unit; March 14, 2 units; July 23, 5 units; October 8, 15 units. 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).

Trial Balance

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. Conversely, when prices fall (deflationary times), FIFO ending inventory account balances decrease and the income statement reflects higher cost of goods sold and lower profits than if goods were costed at current inventory prices. The effect of inflationary and deflationary cycles on LIFO inventory valuation are the exact opposite of their effects on FIFO inventory valuation.

Examples of the Specific Identification Method

Every time the company sells products to customers, they dispose of a portion of the company’s inventory asset. Goods available for sale refers to the total cost of all inventory that the company had on hand at any time during the period, including beginning inventory and all inventory purchases. Suppose that at the end of January 31, 2018, they had 50 oil filters on hand at a cost of $7 per unit. This means that at the beginning of February, they had 50 units in inventory at a total cost of $350 (50 × $7).

1. But the method is relatively straightforward although it requires some detailed records of certain specific costs.
2. 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.
3. As a result, the earliest acquisitions would be the items that remain in inventory at the end of the period.
4. Periodically, match your records with the actual items on hand to ensure accuracy.

Accounting Crash Courses

The company’s profit relating to consigned goods is normally limited to a percentage of the sales proceeds at the time of sale. 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. Suppose you are credit note what is a credit note the assistant controller for a retail establishment that is an independent bookseller. The company uses manual, periodic inventory updating, using physical counts at year end, and the FIFO method for inventory costing.

In the Specific Identification Method, as the name implies, every specific item in the inventory is identified and valued individually for as long as it remains in the inventory. Ending inventory cost – This is the final step where the remaining items are valued at their specific costs. The gallery records the COGS for this sale as its original purchase price of $10,000. After the sale, adjust the total inventory value by deducting the cost of the sold item.

We hope you now have a better understanding of the specific identification inventory method and how to implement it. If she had used FIFO inventory to calculate COGS and gross profit for this day of sales, she would calculate the total units sold on the day, which was 66. To get to 66 units from the purchases record, she would take the 20 vanilla and linen units and 26 of the brisket. FIFO assumes a cost flow based on the order of inventory acquisition, while the specific inventory method assigns actual costs to each item individually.

During the month, they purchased 20 filters at a cost of $7, for a total cost of $140 (20 × $7). Figure 10.3 illustrates how to calculate the goods available for sale and the cost of goods sold. This method is too cumbersome for goods of large quantity, especially if there are not significant feature differences in the various inventory items of each product type. However, for purposes of this demonstration, assume that the company sold one specific identifiable unit, which was purchased in the second lot of products, at a cost of $27. The first-in, first-out method (FIFO) records costs relating to a sale as if the earliest purchased item would be sold first. However, the physical flow of the units sold under both the periodic and perpetual methods would be the same.

Offering a clear picture of its goods, and maintaining an appealing, timely supply at competitive prices is one way to keep the coo verb shopping experience positive. Thus, accounting for inventory plays an instrumental role in management’s ability to successfully run a company and deliver the company’s promise to customers. Although our discussion will consider inventory issues from the perspective of a retail company, using a resale or merchandising operation, inventory accounting also encompasses recording and reporting of manufacturing operations.

You can manipulate net income

It then tallies up the value of all scanned products to get the value of the ending inventory. The Specific Identification Method only works if you are always able to separate out each individual item in your inventory. Inventory can be in the form of raw materials, parts, components, or finished products.

This method is more expensive to put into practice compared to alternate methods where items are grouped together. Larger companies with much larger inventories could make use of RFID tags or barcodes or QR codes and use an automated process to track each individual item. A requirement of the Specific Identification Method is that it should be possible to track each item individually as it enters your inventory, makes its way through it and finally exits the inventory. This makes the Specific Identification Method relatively more expensive to implement than other methods where items because they are interchangeable, are clubbed together (eg LIFO & FIFO). Match cost to sales – This is done while calculating the COGS the cost and revenue is matched for each product.

If it suits your business, you probably realized that the minute you started reading this article. 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. 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. The important point is that every item is tracked individually and not as a part of a group.

It is equally important to understand the disadvantages of specific identification method stock sales. Examples of situations in which the specific identification method would be applicable are a purveyor of fine watches or an art gallery. When you decide to sell some, you could choose whichever purchase had the highest price to lower your taxes now. Of course, you will eventually have to sell some shares using the lowest price, but you can do that at a time that works best for your tax and other financial goals. Large companies with a large number of items in inventory need automated systems to implement this method of inventory evaluation.

Some specific industries (such as select retail businesses) also regularly use these estimation tools to determine cost of goods sold. Although the method is predictable and simple, it is also less accurate since it is based on estimates rather than actual cost figures. 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. The specific identification method is a way to calculate cost of goods sold and ending inventory by tracking every single unit of inventory and adjusting the balances when inventory is sold and when it is purchased.