Specific Identification Inventory Method

The specific identification inventory method is a way of determining the cost of goods sold and the value of the ending inventory.

The specific identification 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.

Whilst the method has the advantage that it accurately matches each item of inventory with its specific cost, it has the disadvantage that net income can be manipulated by the business by careful selection of which identical items remain in inventory at the end of the accounting period.

Specific Identification Inventory Method Example

By way of illustration.

Suppose a business has total purchases for the year of 59 units with a total value of 16,790 made up as follows:

1. January 9 Purchased 12 units 250 per unit
2. March 14 Purchased 20 units 275 per unit
3. July 23 Purchased 8 units 300 per unit
4. Oct 8 Purchased 19 units 310 per unit

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.

Under the specific identification method the cost of the ending inventory is calculated as shown in the following table:

Specific identification inventory method – Closing inventory
Purchase Date Units Unit Value  Value
January 9 1 250 250
March 14 2 275 550
July 23 5 300 1,500
October 8 15 310 4,650
Ending 23 6,950

Assuming there was no opening inventory, the cost of goods sold (COGS) must now be equal to the difference between the goods purchased of 16,790 and the ending inventory of 6,950, which is 9,840. This can be seen from the table below:

Specific identification inventory method – COGS
Purchase Date Units Unit Value  Value
January 9 11 250 2,750
March 14 18 275 4,950
July 23 3 300 900
October 8 4 310 1,240
Ending 36 9.840

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.

Other methods of determining inventory movements included FIFO (first in first out), the LIFO (last in first out), and the average cost method.

Specific Identification Inventory Method November 6th, 2016