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. They needed to use the specific identification inventory method to accurately track and value the unique pieces of art they acquire. In the context of inventory valuation, the specific identification inventory method presents several advantages and disadvantages.
If you need to use the specific identification method, make sure you’re tracking correctly and do an inventory count once a month to verify your numbers. Because each item is unique and its cost has nothing to do with the others, specific identification should be used to calculate the cost and gross profit. This method is typically used by companies that sell high-ticket products or that want to very closely control inventory and track sales trends. Both the cost of the item 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. Since every item in inventory is individually tracked and valued, it becomes easier to calculate the ending inventory at the end of a fiscal period.
Since the calculation of specific identification method of inventory valuation requires a lot of details about the inventory, it may not be suitable for all businesses. 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.
Stock sales
If you make custom motorcycles that are unique, you should probably use specific identification. If you sell different versions of similar items, like the car direct vs indirect cash flow wash business above, your inventory management software will give you up-to-date data on which items are selling the most. That will enable you to purchase new inventory that meets your current sales trends.
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This includes the cost of acquisition (eg purchase cost) of the item but also other costs while the item is in the inventory (eg maintenance cost). Companies that deal with high-value items such as jewelry, handicrafts, etc., mainly use this method as it keeps a record of each of such items having high value. However, it is not the case in the companies where the FIFO (First in, first out), LIFO (Last in, first out), or any other method for the valuation of inventory is used as those methods group the different items together based on certain specified criteria. However, specific identification is a great tool in certain limited situations.
If the furniture sells for $15,000, you would receive $10,000 and the shop would keep the remaining $5,000 as its sales commission. A key point to remember is that until the inventory, in this case your office furniture, is sold, you still own it, and it is reported as an asset on your balance sheet and not an asset for the consignment shop. After the sale, the buyer is the owner, so the consignment shop is never the property’s owner.
Gain unlimited access to more than 250 productivity Templates, CFI’s full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more. This information is then uploaded to the product database, where the inventory software correlates each bar code against a product name and value. Each item is unique and cannot be clubbed together with another when being valued. The Specific Identification Method is complicated to apply to items that are interchangeable and therefore cannot be used for such inventories. In the same way, the Specific Identification Method can also be used to calculate excess inventory. If you enjoyed this article, you might also like our article on different types of inventory or our article on Kanban inventory system.
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. At tax time, using the method described above, the investor can easily match up the shares sold for $70 with the most expensive of the shares purchased (for $60 per share).
You know exactly what’s selling
Transportation costs are commonly assigned to either the buyer or the seller based on the free on board (FOB) terms, as the terms relate to the seller. Transportation costs are part of the responsibilities of the owner of the product, so determining the owner at the shipping point identifies who should pay for the shipping costs. The seller’s responsibility and ownership of the goods ends at the point that is listed after the FOB designation. Thus, FOB shipping point means that the seller transfers title and responsibility to the buyer at the shipping point, so the buyer would owe the shipping costs. The purchased goods would be recorded on the buyer’s balance sheet at this point.
- It includes 400 shares purchased for $40 per share, 300 shares at $60 per share, and the remaining 300 shares at $20 per share.
- The important point is that every item is tracked individually and not as a part of a group.
- The manufacturer’s finished goods inventory is equivalent to the merchandiser’s inventory account in that it includes finished goods that are available for sale.
- 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.
- This method of inventory evaluation can be used by small and large companies.
- In addition to questions related to type, volume, obsolescence, and lead time, there are many issues related to accounting for inventory and the flow of goods.
Advantages of the Specific Identification Method
The last-in, first out method (LIFO) records costs relating to a sale as if the latest purchased item would be sold first. As a result, the earliest acquisitions would be the items that remain in inventory at the end of the period. For example, assume that you sell your office and your current furniture doesn’t match your new building. One way to dispose of the furniture would be to have a consignment shop sell it. The shop would keep a percentage of the sales revenue and pay you the remaining balance. Assume in this example that the shop will keep one-third of the sales proceeds and pay you the remaining two-thirds balance.
By keeping close track of which units are selling the most each day, Iliana is able to make smart orders and accurately show the cost of each scent. The first table in the graphic shows purchases made in the week leading up to our example day and the second table shows units sold on that day. Various other issues that affect inventory accounting include consignment sales, transportation and ownership issues, inventory estimation tools, and the effects of inflationary versus deflationary plant asset management market cycles on various methods. Gearhead exists to provide a positive shopping experience for its customers.
examples using the specific identification method
He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Let’s take a look at a few examples of the specific identification method and compare its results to those we’d achieve by using other methods. Say an investor owns 1,000 shares of ABC company, a volatile small-cap manufacturer. It includes 400 shares purchased for $40 per share, 300 shares at $60 per share, and the remaining 300 shares at $20 per share. This method provides a precise valuation of inventory, and so makes the balance sheet more accurate.
These numbers often need to be estimated, diminishing the specificity advantage of the specific identification method. Thus, this method is generally limited to large, high-ticket items which can be easily identified specifically (such as tract houses). For Iliana’s car wash business, the importance of inventory management comes from tracking sales trends. She sells several different types of air fresheners that all cost about the same.
We’ve covered several inventory management types, including, LIFO vs. FIFO and weighted average cost. We’ve also considered whether to use a perpetual or periodic inventory system. Studying the advantages and disadvantages of a financial concept like specific identification method stock sales is necessary in order to have a clear idea about it.
