Specific Identification Method

The specific identification method is one of the accounting methods used for the valuation of the inventory where the track of every item of the inventory used in the company is kept, from the time such inventory comes in the business till the time it goes out of business, along with assigning the cost to each such items individually rather than grouping them.

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. However, it is not the case in the companies where the FIFO (First in, first out), LIFO (Last in, first out), or any other method for the valuation of inventory is used as those methods group the different items together based on certain specified criteria.

• Specific identification method is a method of inventory costing that involves identifying and tracking the cost of each item in the stock.
• It involves keeping track of each item of inventory the company utilizes from the time it enters the business until it leaves.
• This method is mainly used by businesses that deal in high-value things like jewelry, handicrafts, etc.
• One of the key ideas in inventory valuation is the Particular Identification Method, which tracks each inventory item's cost to pinpoint crucial things like the Cost of Goods Sold, Beginning Inventory, and Ending Inventory.

Specific identification method accounting is one of the vital inventory valuation concepts in accounting wherein each inventory item and its associated cost is tracked to identify the critical items like Cost of goods sold, beginning inventory and ending inventory.

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. After that, the cost of the specific items which the company sells during a period is included in the cost of the goods sold during that particular period, and the cost of the items that remain as part of the inventory of the company at the end is included as the closing stock of the company for that period.

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.

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.

The process of specific identification method for inventory costing has a simple formula. It deals with calculation of the Cost Of Goods Sold(COGS) and also calculating the ending inventory based on the cost that is assigned to the particular item that is sold and finally the stockpile that remains.

The COGS refers to the total cost of all the items that were sold during that particular period. To calculate the COGS using the method, we need to do the summation of the cost of those items. The formula for the same is as follows:

COGS = Cost of the item1 + Cost of item 2 + Cost of item 3 +………. + Cost of item n.

The ending inventory is calculated by adding up the same at the end of the accounting period.

Ending inventory value = Cost of unsold item1 + cost of unsold item2 + cost of unsold item3 + ………. + cost of unsold item n.

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.

In the process, the company needs to keep track of the following:

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.

Match cost to sales – This is done while calculating the COGS the cost and revenue is matched for each product.

Ending inventory cost – This is the final step where the remaining items are valued at their specific costs. This provides a very clear and precise measure of the same.

Company Y ltd. Deals with different trading pens in the market. In August 2019, the following transactions took place in the company.

In August 2019, the company sold a total of 1,100 units. Out of the total inventory sold, 400 units are sold out of purchases on 01-Aug-2019; 200 units out of the purchases made on 08-Aug-19; 200 units out of the purchases made on 22-Aug-19; the rest of 300 units out of purchases made on 31-Aug-19.

Calculate the value of the closing stock of the company at the end of August 2019 and the goods sold during August 2019.

Solution

Calculation of the closing stock at the end of August 2019;

Thus, the closing stock value at the end of August 2019 is $ 2,420.

Calculation of the cost of goods sold for August 2019;

Thus the value of the cost of goods sold for August 2019 is $ 1,315.

The financial concept of specific identification method of inventory valuation has some advantages, as given below.

• The first and most important advantage of using the Specific identification method is that it helps the business keep track of every item of the inventory used in the company from the time such inventory comes into the business till the time it goes out of business.
• With the use of the specific identification, method cost is assigned to every item used in the company individually. In the LIFO inventory and FIFO methods, the cost is assigned to the inventory by grouping them based on specified criteria. It ensures a high degree of accuracy in the valuation of closing stock at the end of a particular period and the valuation of the cost of goods sold during the period.

It is equally important to understand the disadvantages of specific identification method stock sales. Let us go through them in details.

• As it tracks every item of the inventory used in the company from the time such inventory comes into the business until the time it goes out of business is kept, it requires lots of effort and time from the person responsible for such tracking.
• If the companies use the Specific identification method, then under those situations, the company's net income can be manipulated easily by the company's management.
• As the company has a vast number of transactions, it is difficult to identify the purchased products, so this method is rarely used. It is restricted to businesses dealing with high-value items.

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.

This article has been a guide to what is Specific Identification Method. We explain the formula along with example and how to do, its advantages & disadvantages. You can learn more about finance from the following articles –

• Black Tuesday
• Raw Material Inventory
• Periodic Inventory System
• Formula of Average Inventory