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 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. 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.
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. The specific identification inventory method is one of the available methods used in inventory management. Clearly the method used to determine which units are sold and which remain in closing inventory determines the value of the cost of goods sold and the closing inventory. As profit depends on the cost of goods sold, the method chosen will affect the profits of a business. 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.
Jose’s Coches buys totaled cars at auction and then resells them after making repairs. Take a look at Jose’s inventory turn and how cost of goods sold and gross profit are calculated. This method is typically used by companies that sell high-ticket products or that want to very closely control inventory and track sales trends.
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Choose CFI for unparalleled industry expertise and hands-on learning that prepares you for real-world success. They note that Sunset Bliss was bought on March 1, Mountain Majesty on March 10, and Ocean Odyssey on March 15. 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.
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. 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. The chances of losing or misplacing inventory under such a system are almost obliterated because of its accuracy. In the context of inventory valuation, the specific identification inventory method presents several advantages and disadvantages.
The specific identification inventory method is a way of determining the cost of goods sold and the value of the ending inventory. The method can only be applied when each item of inventory can be specifically identified and tracked from purchase to sale, and therefore tends to be used for low volume, high priced items. 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.
Specific Identification Inventory Valuation Method
- To get to 66 units from the purchases record, she would take the 20 vanilla and linen units and 26 of the brisket.
- 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.
- 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.
- Jose’s Coches buys totaled cars at auction and then resells them after making repairs.
- Diane Costagliola is a researcher, librarian, instructor, and writer who has published articles on personal finance, home buying, and foreclosure.
Implementing the specific identification method requires a systematic approach tailored to inventory valuation. 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. With sales of $330, gross profit comes in at $246.10, just a bit above the total of $243.60 using specific identification.
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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. 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 specific identification method is useful and usable when a company is able to identify, mark, and track each item or unit in its inventory.
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.
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. 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. Other methods of determining inventory movements included FIFO (first in first out), the LIFO (last in first out), and the average cost method. After the sale, adjust the total inventory value by deducting the cost of the sold item.
Large companies with a large number of items in inventory need automated systems to implement this method of inventory evaluation. 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. Ending inventory cost – This is the final step where the remaining items are valued at their specific costs.
Can provide precise information on stock levels, money “stuck” in free expensify t 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. 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). 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. The ending inventory is calculated by adding up the same at the end of the accounting period.
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 callable preferred stock identification is probably the best way to manage inventory.
The Specific Identification Method is complicated to apply to items that are interchangeable and therefore cannot be used for such inventories. In the same way, the Specific Identification Method can also be used to calculate excess inventory. In this article, we will study the Specific Identification Method of Inventory Valuation.