The process is incredibly difficult for larger businesses – such as big box stores – to achieve because of the sheer volume that such companies move on a daily basis. If you need to use the specific identification method, make sure you’re tracking correctly and do an inventory count once a month to verify your numbers. Because each item is unique and its cost has nothing to do with the others, specific identification should be used to calculate the cost and gross profit.

The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. Read on to learn why you may want to use this method when other methods, such as the first in, first out method, are much easier to implement. At the end of each quarter, all products which are in the factory are run on a conveyor-based automated scanning system. The RFID tag on each product is scanned before it is returned either to the warehouse or back to the factory floor. It then tallies up the value of all scanned products to get the value of the ending inventory.

Companies that deal with high-value items such as jewelry, handicrafts, etc., mainly use this method as it keeps a record of each of such items having high value. 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. However, specific identification is a great tool in certain limited situations.

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. Diane Costagliola is a researcher, librarian, instructor, and writer who has published articles on personal finance, home buying, and foreclosure. Take your learning and productivity to the next level with our Premium Templates.

If that’s the right way to go for your business, it will get the job done. 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.

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. Examples of situations in which the specific identification method would be applicable are a purveyor of fine watches or an art gallery. These requirements can be achieved with a simple accounting system, possibly just an electronic spreadsheet. This means that a smaller business should find it relatively easy to employ the specific identification method, especially when unit volumes are low.

What Is the Specific Identification Inventory Method?

We’ve covered several inventory management types, including, LIFO vs. FIFO and weighted average cost. We’ve also considered whether to use a perpetual or periodic inventory system. Since every item in inventory is individually tracked and valued, it becomes easier to calculate the ending inventory at the end of a fiscal period. FIFO assumes a cost flow based on the order of inventory acquisition, while the specific inventory method assigns actual costs to each item individually. The gallery records the COGS for this sale as its original purchase price of $10,000. Unless you only sell a few items a year and each one has a substantially different cost, you will likely be able to very closely approximate the specific identification numbers with one of the more commonly used methods.

Step 4: Update Inventory Value

It requires the specific tracking of every single unit purchased and sold. Specific identification inventory valuation is often used for more expensive items such as furniture or vehicles. It also is used when the products stored have widely different features and costs. This method is applicable only when a company can uniquely identify each unit of inventory, such as through serial numbers or a lot of numbers. Therefore, this method allows for the actual cost of each interest received journal entry specific branch to be tracked and assigned to the unit. The financial concept of specific identification method of inventory valuation has some advantages, as given below.

Companies that deal with high-value items such as jewelry, handicrafts, etc., mainly use the Specific identification method as it keeps a record of each of such items having a high value. Retailers who sell luxury goods usually a specific serial number or batch number or any other unique identifier and so they benefit from this method of inventory tracking. It is an alternative to the commonly used inventory valuation method such as FIFO (First in, first out), LIFO (Last in, first out) or Weighted Average method. For example, relating shipping and storage costs to a specific inventory item becomes difficult. These numbers often need to be estimated, diminishing the specificity advantage of the specific identification method.

Specific Identification Method – Pros & Cons [with Examples]

1. In this article, we will study the Specific Identification Method of Inventory Valuation.
2. This method of inventory evaluation can be used by small and large companies.
3. Smaller companies with fewer items in the inventory may be able to manually count each item and simply fill out a paper sheet or use their mobile phones to track the information and store it in a mobile inventory solution.
4. Business uses this method as it helps in keeping track of each item’s precise cost and utilizing it to determine the worth of the inventory; specific identification aids in ensuring the accuracy of business accounting.
5. It is an alternative to the commonly used inventory valuation method such as FIFO (First in, first out), LIFO (Last in, first out) or Weighted Average method.

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. It requires a detailed physical count so that the company knows exactly how many of each good bought on specific dates comprise the year-end inventory. 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. Don’t worry if you end up using a periodic inventory system and the gross profit method to complete your books every quarter.

When an item is sold, record the specific cost of that item as the cost of goods sold (COGS). For every item selected, maintain a detailed record of its purchase date, cost, and any other relevant details. If your inventory is unique enough, that could be as easy as checking a spreadsheet. 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.

What Is the Specific Identification Inventory Valuation Method?

Choose items in your inventory that you want to track individually based on their distinctive features or high value. 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. The important point is that every item is tracked individually and not as a part of a group. Periodically, match your records with the actual items on hand to ensure accuracy.

Specific Identification Method Requirements

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. 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. 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.

Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. By the end of April, Sophia’s Art Gallery conducts a physical check of its art pieces and confirms only Mountain Majesty and Ocean Odyssey remain, validating the accuracy of its records. The key benefit is that your cost of goods sold and ending inventory numbers will always be exactly correct, as long as you are confirming with an ending inventory count to catch theft budgeted synonym or spoilage. They supply to industrial companies worldwide which use these motors in their own products.

For Iliana’s car wash business, the importance of inventory management comes from tracking sales trends. She sells several different types of air fresheners that all cost about the same. Here is a typical day of sales and the purchases that built her 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. Individual tracking of cost – Each item manufactured or purchased needs to have a proper record of its cost, which will be unique for all in case of specific identification method for inventory costing.