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Specific Identification Inventory Valuation Method Definition

Specific Identification Inventory Valuation Method Definition

This method tracks individual inventory items, and therefore, it helps in the efficient management of the inventory. Also, it helps in the accurate calculation of ending inventory cost and the cost of goods sold. 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.

Like the US, other countries also have different inventory methods to choose from. Your industry standards, accounting policies, tax regulations, and type of business are all factors that determine which personal trainer invoice template one is appropriate. If they sell 150 apples, the FIFO method implies that the initial 100 apples were sold at $1 each. If your inventory is unique enough, that could be as easy as checking a spreadsheet.

  1. With sales of $330, gross profit comes in at $246.10, just a bit above the total of $243.60 using specific identification.
  2. These numbers will need to be estimated and reducing the specific identification’s benefit of being extremely specific.
  3. This approach may work if your business deals with pricey, distinctive goods with varying worth and costs—like luxury trinkets, artwork, or automobiles.

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. But if you run a convenience store, use FIFO or the average cost method. If you sell different versions of similar items, like the car wash business above, your inventory management software will give you up-to-date data on which items are selling the most.

This means that a smaller business should find it relatively easy to employ the specific identification method, especially when unit volumes are low. The cost of ending inventory under specific identification is the sum of all the costs assigned to each inventory item, such as accumulated cost of Unit A, Unit B, and so on, that haven’t yet been sold. Because costs are assigned to specific units of inventory, no cost flow assumption is required, and it’s simple to identify the costs remaining in ending inventory. As you can see, this method requires us to keep track of each ring’s cost and selling date. This way, we can match the cost of each ring with its revenue and accurately measure our gross profit. This method also reflects the physical flow of goods in and out of your inventory.

Example of the Specific Identification Method

Firms find this method easy to apply when purchasing and selling large inventory items such as cars. Under the specific identification method, the firm must identify each unit in inventory, unless it is unique, with a serial number or identification tag. This method is rarely used, because there are few purchased products that are clearly identified in a company’s accounting records with a unique identification code. Thus, it is typically restricted to unique, high-value items for which such differentiation is needed. Most organizations instead sell products that are essentially interchangeable, and so are more likely to use a FIFO, LIFO, weighted average, or similar system. It is also very time-consuming to track inventory on an individual unit basis, which restricts its use to smaller inventory quantities.

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This method is typically used by companies that sell high-ticket products or that want to very closely control inventory and track sales trends. Examples of situations in which the specific identification method would be applicable are a purveyor of fine watches or an art gallery. 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. Valuation is performed by associating certain costs to each tracked item. 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).

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Each of the cars is tracked individually from the time they enter the lot until they are sold. Specific identification is a method of finding out ending inventory cost that requires a detailed physical count. Eliminate manual inventory tracking with the right accounting software. Our best small business accounting software guide includes solutions with exceptional inventory tracking features.

The https://www.wave-accounting.net/ method is a technique of inventory valuation in which each item is tracked right from the time the item is purchased until the time it is sold. This method is applied where it is easy to identify separate inventory items through bar code, RFID tag, stamp receipt, unique serial number, or any other source. The specific identification method is a way of tracking inventory costs without the need for cost flow assumptions. It’s an inventory costing method that suits businesses with high-value, low-volume goods. However, maintaining records can be tedious if your business doesn’t have an organized accounting and information system. Establishing one requires having an accounting software program and a synchronized system of manual records.

That will enable you to purchase new inventory that meets your current sales trends. The method that we’ll talk about today is not so easy to manage, though. It requires the specific tracking of every single unit purchased and sold.

Suppose you bought 10 for $1 each on Monday and 10 for $2 each on Tuesday. Logically, you would presume that the 5 apples you sold from Monday’s purchase would cost $1 each. But this method might not be worth the hassle if you sell cheap or common items with similar costs and values, such as books, clothes, or groceries. This information provides insight into the worth of your stock to keep your business profitable. You can also avoid some of the problems that other methods can create.

However, individually tracking every item can be labor-intensive and time-consuming. You need a system that can identify each item by a unique number or code. Another reason is that it helps you avoid any inventory write-downs or losses due to changes in market prices. Obsolete and overvalued inventories won’t be a problem because you know the cost per item. Jose’s Coches buys totaled cars at auction and then resells them after making repairs.

When this information is found, the amount of goods are multiplied by their purchase cost at their purchase date, to get a number for the ending inventory cost. They needed to use the specific identification inventory method to accurately track and value the unique pieces of art they acquire. 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. In theory, this method is the best method because it relates the ending inventory goods directly to the specific price they were bought for.

Step 5: Verify with Physical Inventory

The weighted average cost formula would use units 851, 852, and 853 to come up with an average cost for the sale of 851. 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.

The specific identification inventory method tracks the costs of individual items of inventory until they are sold to customers. The cost of goods sold (COGS) and cost of ending inventory are determined by the actual cost assigned to each physical unit of inventory. The specific identification method of inventory costing attaches the actual cost to an identifiable unit of product.

For example, a car dealer sold a 2021 Ford Explorer with a vehicle identification number (VIN) ending 3716. The dealer has several 2021 Ford Explorers in their lot, so records must show the cost of this specific 2021 Ford Explorer separately. When VIN 3716 is sold, the actual cost of that specific 2021 Ford Explorer is removed from inventory and placed in COGS.