The specific identification inventory method tracks the costs of individual items of inventory until they are sold to customers. The cost of goods sold (COGS) and cost of ending inventory are determined by the actual cost assigned to each physical unit of inventory.
This guide discusses how the specific identification inventory method works, who it’s optimal for, its highlights and drawbacks, and how to calculate ending inventory and COGS using it.
KEY TAKEAWAYS
- The specific identification method tracks each unit of inventory individually rather than accumulating costs using cost flow assumptions.
- The COGS and cost of ending inventory matches the physical units sold and unsold.
- Keeping detailed records is essential in implementing the specific identification method.
How Does the Specific Identification Method Work?
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.
For every sale, you must specify the exact item of inventory that’s sold. For example, a car dealer sold a 2021 Ford Explorer with a vehicle identification number (VIN) ending 3716. The dealer has several 2021 Ford Explorers in their lot, so records must show the cost of this specific 2021 Ford Explorer separately. When VIN 3716 is sold, the actual cost of that specific 2021 Ford Explorer is removed from inventory and placed in COGS.
How To Calculate Ending Inventory Using the Specific Identification Method
The cost of ending inventory under specific identification is the sum of all the costs assigned to each inventory item, such as accumulated cost of Unit A, Unit B, and so on, that haven’t yet been sold. Because costs are assigned to specific units of inventory, no cost flow assumption is required, and it’s simple to identify the costs remaining in ending inventory.
How To Calculate COGS Using the Specific Identification Method
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. For additional insights, check out our article on what COGS is and how to calculate it.
Inventory tracking is an essential task in bookkeeping. Our bookkeeping guide discusses how inventory tracking relates to the whole bookkeeping process.
Who Should Use the Specific Identification Method
Eliminate manual inventory tracking with the right accounting software. Our best small business accounting software guide includes solutions with exceptional inventory tracking features.
Advantages & Disadvantages of Specific Identification Method
| ADVANTAGES | DISADVANTAGES |
|---|---|
| Tracks the physical movement of goods through serial numbers or other unique identifiers | Is not ideal for commodities like vegetables, fruits, and meat that are sold based on weight or bulks |
| Reflects the actual cost of goods on hand in ending inventory | Requires detailed bookkeeping |
| Reports actual COGS in the income statement | Not applicable for fast-selling goods |
| Requires no cost flow assumption | Not found in popular accounting software |
Example of Specific Identification Inventory Method
ABC Dealership sells SUVs. The company purchased three units of SUVs with VINs ending in 0001, 0002, and 0003. The cost of each SUV is as follows:
- SUV 0001: $44,235
- SUV 0002: $45,030
- SUV 0003: $47,300
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.
The total purchases of ABC Dealership for the SUVs is $138,515 ($44,235 + $45,030 + $47,300 + $1,200 + $750). The costs of shipment and insurance are always included because these are unavoidable costs in the purchase transaction.
When computing the unit cost, you have to allocate common costs (shipment and insurance). We then compute the cost per SUV as follows:
- SUV 0001: $44,235 + (1,200/3) + (750/3) = $44,885
- SUV 0002: $45,030 + (1,200/3) + (750/3) = $45,680
- SUV 0003: $47,300 + (1,200/3) + (750/3) = $47,950
Based on the information above, SUV 0001 and 0003 were sold. Hence, you just need to add their individual costs to compute COGS. For this example, COGS is $92,835.
Only SUV 0002 is remaining, so the cost of ending inventory is $45,680.
Frequently Asked Questions (FAQs)
The FIFO method uses the earliest unit costs to determine the cost of units sold during the year, or COGS. Hence, the latest unit costs are included in the ending inventory. Meanwhile, the specific identification method uses the cost of the actual units when computing COGS and ending inventory.
In general, businesses with high-value and slow turnover goods would benefit from this method. Examples of these businesses would be vehicle dealerships, jewelry and luxury stores, furniture warehouses, and art galleries, to name a few.
Bottom Line
The specific identification method is a way of tracking inventory costs without the need for cost flow assumptions. It’s an inventory costing method that suits businesses with high-value, low-volume goods. However, maintaining records can be tedious if your business doesn’t have an organized accounting and information system. Establishing one requires having an accounting software program and a synchronized system of manual records.
