Unlocking the Secrets of Specific Identification Method for Inventory Valuation

Only SUV 0002 is remaining, so the cost of ending inventory is $45,680. Mr. Green’s role in GNM was to render tax consultation services to traders. The Specific Identification Method is vital for business students to learn, as it prepares them for dealing with ______ in their future professional roles. Implement FIFO or LIFO to reduce profit manipulation the elderly or disabled irs tax credit for 2020 details and order sales consistently. Ensures accurate cost measurement and profitability analysis; labor-intensive and potentially manipulable. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.

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There are two main problems with the specific identification method. The first main problem is that the system takes a lot of time and effort. Each piece of inventory must be separately scanned and entered into the system. The second reason is that most goods can’t be separately identifiable.

Understanding the Specific Identification Method for Inventory Valuation

It tracks individual item costing which helps in accurate profit calculation and asset tracking. This method is applicable only when a company can uniquely identify each unit of inventory, such as through serial numbers or a lot of numbers. Therefore, this method allows for the actual cost of each specific branch to be tracked and assigned to the unit. 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. Even though this system is extremely accurate, few companies actually use it.

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When individual items can be clearly identified with a serial number, stamped receipt date or RFID tag, this method is applicable. 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.

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• Let’s assume we’ve not lost any to “shrinkage” (breakage, customer theft, or employee theft) and that our perpetual records match our physical count.
• The financial concept of specific identification method of inventory valuation has some advantages, as given below.
• The receiving department can unpack the shipment, scan each computer into the system, and assign the total invoice cost to the individual goods.
• The ending inventory is calculated by adding up the same at the end of the accounting period.

Eric is an accounting and bookkeeping expert for Fit Small Business. He has a CPA license in the Philippines and a BS in Accountancy graduate at Silliman University. Eliminate manual inventory tracking with the right accounting software. Our best small business accounting software guide includes solutions with exceptional inventory tracking features. By default, the IRS, brokerage firms, and most trade accounting programs use the First-In- First-Out (FIFO) accounting method for securities. If you sell security A, its cost-basis is the first lot purchased — the first one “out” or sold.

As usual, we prepare the journal entry and post it to both the GL and the subsidiary ledger. Let’s start a worksheet and do our calculations step by step, tracking purchases, COGS, and inventory on hand for each date that something happens. Let’s start our analysis by taking just one item, baseball bats, and applying the different methods one at a time. The accountant will note down the sale and also how much that particular camera cost when it was bought from the supplier.

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. 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. The specific identification inventory valuation method tracks the cost of each individual item. Companies use this approach to know exactly how much they paid for an item in their inventory. 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.

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. But the method is relatively straightforward although it requires some detailed records of certain specific costs. The COGS under the specific identification method is the sum of all the costs assigned to inventory units that were sold during the period. Similar to ending inventory, it’s very easy to determine the specific inventory units sold and to identify the cost of those units.

Assume the supplier offers “free shipping” which actually means the shipping costs are built into the price the vendor is charging NewCo. Andy Smith is a Certified Financial Planner (CFP®), licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career. The ending inventory is calculated by adding up the same at the end of the accounting period. The company also paid for $1,200 shipping costs and $750 insurance. During the month, an agent sold SUV 0003 for $47,950, and another agent sold SUV 0001 for $52,500.