The specific identification inventory method determines 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 requirements of a specific identification tracking system are:
Inventory items must be able to be tracked individually. The best way to do that is with labels with serial numbers or Radio Frequency Identification Tag (RFID tag) that contains a unique number that identifies the product. The cost of each item must be able to be tracked individually. The cost per purchased item should be clearly identified in your accounting system and associated with a unique identification number. Inventory must be relieved for the specific cost associated with an inventory item that is sold.
These requirements can be followed with a simple accounting system, such as a spreadsheet. The specific identification accounting method is best used for small businesses with low unit volumes.
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Specific Identification Method Advantages and Disadvantages
The specific identification method introduces a high degree of accuracy to the inventory cost since the exact cost at which something was purchased can be recorded in the inventory records and charged to the cost of goods sold when the related item is sold.
However, 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. Instead, most organizations 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, restricting its use to smaller inventory quantities. flow, income statement, tax returns, materials, reports, reports
Examples of situations in which the specific identification method would be applicable are a purveyor of fine watches or an art gallery.
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