What is the Specific Identification Method? Definition Meaning Example

Here the point is to be noted that each item of inventory must be identifiable otherwise specific assignment of cost will not be possible. The final cost assumption method for Mega Irrigation to consider is the weighted average. The weighted average method, also known as average cost, involves computing the weighted average cost per unit of inventory sold at the time of sale; it assumes that inventories are sold simultaneously. Perhaps the most significant goal of accounting for inventory is to have an accurate assessment of costs and sales. Inventory valuation allows a company to provide a monetary value for items that they have in their inventory. This information permits a company to properly evaluate expenses and revenues on their financial statements so that they can make sound business decisions.

This method is ideal in situations where small number of easily distinguishable items (such as jewelry, automobiles, handicrafts and furniture etc.) are handled. The 3,000 units in the inventory on April 30 is composed of 500 units from purchases made on April 01, 1,500 units from purchases made on April 12 and 1,000 units from purchases made on April 30. Accordingly, the ending inventory cost and cost of goods sold can be calculated. Examples of situations in which the specific identification method would be applicable are a purveyor of fine watches or an art gallery. If your inventory is unique enough, that could be as easy as checking a spreadsheet. If it isn’t unique, you may need to track it with barcodes or RFID chips.

Perpetual Inventory Systems

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. IAS 2 allows the use of specific identification method, FIFO method and weighted average cost method to value ending inventory. Its up to the management of the entity select the method of inventory valuation by considering relevant factors. Specific identification is used to track and cost specific and identifiable inventory items that are either in or out of stock on an individual basis. This is done with items a company has identified via RFID tag, stamped receipt date, or serial number.

Each of the cars is tracked individually from the time they enter the lot until they are sold. Another alternative method for inventory valuation is weighted average method which averages the value of inventory held at the start of the period and value of inventory purchased or produced during the period. The invoice must be detailed and the purchases must be identifiable by model number, serial number, bar code, or RFID chip. It must be detailed enough to match it with individual items ordered.

What Is the Specific Identification Method for Inventory Costs?

For an efficient and effective specific identification inventory system, your business must have a detailed inventory stock-keeping system that tracks each item of inventory separately. For instance, individual inventory items might be tracked by unique serial numbers, addresses (for real estate), or title numbers. LIFO is an acronym for last-in, first out and assumes that the most recent inventory items purchased are the first ones to be sold, and inventory items https://turbo-tax.org/where-do-i-put-my-union-dues/ purchased first are sold last. As a result, LIFO comes closest to matching current costs of goods sold with revenues when compared to other cost flow assumption methods, such as FIFO or weighted average. Using specific identification method for inventory valuation has some implications for the business and its stakeholders. For example, it can affect the comparability and consistency of the financial statements, as different methods may produce different results.

• As a result, LIFO comes closest to matching current costs of goods sold with revenues when compared to other cost flow assumption methods, such as FIFO or weighted average.
• The specific identification method is mostly used for expensive or high price items like jewellery, furniture, vehicles, etc.
• They also result in different inventory values and cost of goods sold, depending on the price changes and the inventory turnover.
• Rather than identify which specific item you bought at which price, you can use various inventory measurement methods to handle the matter.

Smartly managing inventory can give the advantage of lead production and an optimized supply chain, thereby resulting in reduced cost of production. Adding $6,000 for the three watches to $16,000 and subtracting $11,500 gives you a COGS of $10,500. Subtract that from revenue, and you have the gross margin for February.

What Inventory Method Gives the Most Realistic Net Income?

He completed a Bachelor of Science degree in Accountancy at Silliman University in Dumaguete City, Philippines. Before joining FSB, Eric has worked as a freelance content writer with various digital marketing agencies in Australia, the United States, and the Philippines. Tim is a Certified QuickBooks Time (formerly TSheets) Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience. This is a new type of article that we started with the help of AI, and experts are taking it forward by sharing their thoughts directly into each section. Experts are adding insights into this AI-powered collaborative article, and you could too.

This system is extremely accurate because each piece of inventory can be tracked separately. There are no estimates involved which make the inventory and cost of goods sold numbers more accurate on the financial statements as well. 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.