Specific Identification Method: A Comprehensive Guide for Inventory Valuation

The specific identification method relates to inventory valuationInventory ValuationInventory valuation refers to the practice of accounting for the value of a business' inventory. Business inventories refer to all the, specifically keeping track of each specific item in inventory and assigning cost individually instead of grouping items together – the manner of calculation that is typically done in the first in, first out (FIFO) and last in, first out (LIFO) methods.

Summary

• The specific identification method relates to inventory valuation, specifically keeping track of each specific item in inventory and assigning costs individually instead of grouping items together.
• It is useful and usable when a company is able to identify, mark, and track each item or unit in its inventory. 
• The primary drawback to the specific identification method is that its use requires a definitive ability to easily and consistently identify all the individual items within a company’s inventory, track their cost, and produce them upon sale or the promise of sale.

Understanding the Specific Identification Method

The specific identification method is useful and usable when a company is able to identify, mark, and track each item or unit in its inventory. While the specific identification method can be utilized by larger companies with electronic tags or stickers with serial numbers that can be scanned into an electronic inventory tracking system, it is most common with smaller businesses that can easily identify or count items in their inventory.

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.

Under the specific identification method, it’s also necessary that the cost of each purchased item can be determined on an individual basis. The cost must be easily associated with a number or other identifying feature of the item so that it can be directly connected to that item. Likewise, the item must be easily tracked, found, and available when the promise of sale is made.

The Pros and Cons of the Specific Identification Method

The primary drawback to the specific identification method is that its use requires a definitive ability to easily and consistently identify all the individual items within a company’s inventoryInventoryInventory is a current asset account found on the balance sheet, consisting of all raw materials, work-in-progress, and finished goods that a, track their cost, and produce them upon sale or the promise of sale.

Both the cost of the itemCost of Goods Manufactured (COGM)Cost of Goods Manufactured (COGM) is a term used in managerial accounting that refers to a schedule or statement that shows the total and the amount received for the sale of the item must be attached to a specific item with some form of a unique identifier that singles it out. The process is incredibly difficult for larger businesses – such as big box stores – to achieve because of the sheer volume that such companies move on a daily basis.

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. One benefit of the method is a much higher degree of accuracy when it comes to the actual numbers of items in inventory and then, of course, a higher degree of accuracy when it comes to the numbers of dollars in earned income or profit, as well as any lost revenue if items are damaged, lost, or returned. The chances of losing or misplacing inventory under such a system are almost obliterated because of its accuracy.

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today!®Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

• Cost of Goods Sold (COGS)Cost of Goods Sold (COGS)Cost of Goods Sold (COGS) measures the “direct cost” incurred in the production of any goods or services. It includes material cost, direct
• Economic Order Quantity (EOQ)EOQEOQ stands for Economic Order Quantity. It is a measurement used in the field of Operations, Logistics and Supply Management. The EOQ formula is a tool used to determine the volume and frequency of orders required to satisfy a given level of demand while minimizing the cost per order.
• LIFO vs. FIFOLIFO vs. FIFOAmid the ongoing LIFO vs. FIFO debate in accounting, deciding which method to use is not always easy. LIFO and FIFO are the two most common techniques used in valuing the cost of goods sold and inventory.
• Operating CycleOperating CycleAn Operating Cycle (OC) refers to the days required for a business to receive inventory, sell the inventory, and collect cash from the sale