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. Sometimes, the process can be done simply by an employee laying eyes on the items and marking them down on a piece of paper. In an age where technology and computer programs seem to run everything, the specific identification method is used in a similar way; however, inventory counts are recorded in a database.

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. Under this method, every item sold during the period and every item that remains as part of the company’s inventory is identified and assigned the cost separately. 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. Thus, this method is generally limited to large, high-ticket items which can be easily identified specifically (such as tract houses).

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.

Specific identification accounting is a method to find out inventory costs. The method is based on the movement of specific, identifiable inventory items in an out of stock. When individual items can be clearly identified with a serial number, stamped receipt date or RFID tag, this method is applicable. 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. 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.

What is the Specific Identification Method?

If you sell different versions of similar items, like the the trouble with stock options car wash business above, your inventory management software will give you up-to-date data on which items are selling the most. That will enable you to purchase new inventory that meets your current sales trends. The most common use of specific identification is probably not applicable to your business.

Inventory Valuation using the Specific Identification Method

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. The ending inventory is calculated by adding up the same at the end of the accounting period. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. 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 or spoilage. 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. They supply to industrial companies worldwide which use these motors in their own products.

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1. Take your learning and productivity to the next level with our Premium Templates.
2. If your inventory is unique enough, that could be as easy as checking a spreadsheet.
3. To get to 66 units from the purchases record, she would take the 20 vanilla and linen units and 26 of the brisket.
4. We also provide a simple 5-step framework for implementing it, with real-world examples.
5. Other methods of determining inventory movements included FIFO (first in first out), the LIFO (last in first out), and the average cost method.
6. This method of inventory evaluation can be used by small and large companies.

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 not be a reasonable use of time for a seller of t-shirts or candles.

For Iliana’s car wash business, the importance bookkeeping boise of inventory management comes from tracking sales trends. She sells several different types of air fresheners that all cost about the same. It is an issue that smaller businesses don’t generally face, which is why such companies are the ones that commonly utilize the specific identification method.

Specific Identification Method

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. A major advantage of the specific identification method is the high degree of accuracy when calculating the cost of inventory. The exact cost at which something was purchased is recorded in the inventory records and charged to the costs of goods sold when the related item is sold. 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. There are many companies who prefer to go for the simpler techniques of stockpile calculation which also provide rational approximation of the inventory value rather then specific identification method accounting. But the method is relatively straightforward although it requires some detailed records of certain specific costs.

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. 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.

This method of inventory evaluation can be used by small and large companies. 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. It is equally important to understand the disadvantages of specific identification method stock sales. 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. Jose’s Coches buys totaled cars at auction and then resells them after making repairs.

The Specific Identification Method helps a business track every item that it has acquired and that is in its inventory. If an item exits inventory through a sale, the cost of that item is then added to the Cost of Goods Sold or COGS. 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. Match cost to sales – This is done while calculating the COGS the cost and revenue is matched for each product.

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 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. The gallery records the COGS for this sale as its original purchase price of $10,000.

Each car has a different dealer cost and a different sales price based on the model and its features. Each of the cars is tracked individually from the time they enter the lot until they are sold. Both the cost of the item and the amount received for the sale of the item must be attached to a specific item with some form of a unique identifier that singles it out. 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. Implementing the specific identification method requires a systematic approach tailored to inventory valuation.

If your inventory is unique enough, that could be as easy as checking a spreadsheet. 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. Periodically, match your records with the actual items on hand to ensure accuracy.