What Is the Specific Identification Method for Inventory?
Tim is a Certified QuickBooks Time (formerly TSheets) Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience. He brings his expertise to Fit Small Business’s accounting content.
Eric is a staff writer at Fit Small Business focusing on accounting content. He spends most of his time researching and studying to give the best answer to everyone.
The specific identification inventory method is an accounting method that explicitly identifies each individual unit of inventory and assigns it its actual cost. This method of inventory accounting doesn’t use assumptions like first-in, first-out (FIFO), last-in, first-out (LIFO), and the average cost methods. The cost of goods sold (COGS) and ending inventory are determined by the actual cost assigned to each physical unit of inventory.
This guide includes detail on 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.
How Does the Specific Identification Method Work?
For an efficient and effective specific identification inventory system to work, 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 vehicle identification number (VIN) JNKCV61E09M303716. The dealer has several 2021 Ford Explorers on their lot, so records must show the cost of this specific 2021 Ford Explorer separately. When VIN JNKCV61E09M303716 is sold, the actual cost of that specific 2021 Ford Explorer is removed from inventory and placed in COGS.
What Type of Business Is Specification Identification For?
- Vehicle dealerships: Vehicle dealers have a low volume of high-ticket items that can be tracked easily by VIN.
- Small businesses selling consumer electronics: Large consumer electronics often have unique serial numbers that can be used for identification, making it reasonable to use specific identification. However, if the business sells a lot of identical units, it might be easier to use average cost, LIFO, or FIFO.
- Small businesses selling unique furniture: Specific identification is very suitable for a furniture store if every unit has unique features and designs.
- Businesses using a job order costing: In a job order costing system, goods are heterogeneous because each job has different design specifications. Since each job is different, it makes sense to use specific identification.
What Type of Business Is Specification Identification Not Right For?
- Small to midsized retailers, grocery stores, and convenience stores: The specific identification method isn’t ideal for small-value, high-turnover items. It would be difficult and expensive to track specific units of inventory. The FIFO, LIFO, or average method is more suitable for this type of business.
- Wholesalers: Ordering goods by bulk can be challenging to track individually. Wholesalers often order the same kind of goods in bulk, and specifically identifying them for inventory won’t yield useful information. Instead, the FIFO, LIFO, or average cost method would make it easier to account for the flow of goods.
- Small to midsize manufacturers: Manufacturing involves a multistep process and tracking materials inventory individually would be inefficient. For manufacturers, the LIFO method is more appropriate for tax savings, especially when costs are rising.
Advantages & Disadvantages of Specific Identification Method
| PROS | CONS |
|---|---|
| Tracks the physical movement of goods through serial numbers or other unique identifiers | Is not ideal for goods that are hard to track individually like vegetables and fruits |
| Reflects the actual cost of goods on hand in ending inventory | Requires detailed bookkeeping |
| Reports actual COGS in the income statement | |
| Requires no cost flow assumption | |
How To Assign Costs Under Specific Identification
Costs assigned to a unit of inventory under specific identification not only include the purchase price but also any shipping charges and other costs to bring the asset into inventory.
To illustrate how specific identification works, let’s use a car dealership to show you how we maintain simple inventory records using specific identification. We can analyze our inventory by making an Inventory Quantity Report.
ABC DEALERS INVENTORY QUANTITY REPORT As of July 1, 20x1 | ||||
|---|---|---|---|---|
Date | Description | VIN Ending | Total Cost | |
Beginning Inventory | ||||
Feb. 3, 20x1 | 2022 Ford Explorer | 8952 | $35,139 | |
Feb. 3, 20x1 | 2022 Ford Explorer | 9963 | $31,430 | |
May. 7, 20x1 | 2022 Ford F150 | 8952 | $27,898 | |
May. 7, 20x1 | 2022 Ford F150 | 2315 | $37,893 | |
July 1, 20x1 | Total Beginning Inventory | $132,360 | ||
Step 1: Determine all costs of a newly purchased unit of inventory
On July 15, 20×1, the car dealership purchased two 2022 Ford Ranger units with VINs ending 2278 and 2332 and one 2022 Ford Super Duty with VIN ending 3921. The prices of the Ford Rangers and Ford Super Duty are $22,715 and $34,895, respectively. The sale is also subject to a total shipping insurance of $890. Total shipping costs amounted to $2,331 (excluding shipping insurance) to ship the cars in an enclosed container.
Let’s compute the unit cost of each car type:
2022 Ford Ranger (VINs 2278 & 2332) | |
Unit price | $ 22,715 |
Shipping insurance ($890 ÷ 3) | 297 |
Shipping costs ($2,331 ÷ 3) | 777 |
Unit cost for one unit of 2022 Ford Ranger | $ 23,789 |
2022 Ford Super Duty (VIN 3921) | |
Unit price | $ 34,895 |
Shipping insurance ($890 ÷ 3) | 297 |
Shipping costs ($2,331 ÷ 3) | 777 |
Unit cost for one unit of 2022 Ford Super Duty | $ 35,969 |
When computing the cost of a specific unit of inventory, don’t forget to subtract discounts (if any) and add shipping insurances, shipping costs, and other costs necessary to bring the asset into inventory on the dealer’s lot. Sometimes, directly attributable costs like shipping fees are quoted as a single price. In our example above, the shipping fee is $2,331 for all three cars. Hence, we just need to allocate total shipping costs per unit purchase.
Step 2: Record the purchase as an addition to inventory
To update our inventory records, we need to create another inventory quantity report as of purchase date.
ABC DEALERS INVENTORY QUANTITY REPORT As of July 15, 20x1 | ||||
|---|---|---|---|---|
Date | Description | VIN Ending | Total Cost | |
Beginning Inventory | ||||
Feb. 3, 20x1 | 2022 Ford Explorer | 8952 | $35,139 | |
Feb. 3, 20x1 | 2022 Ford Explorer | 9963 | $31,430 | |
May. 7, 20x1 | 2022 Ford F150 | 8952 | $27,898 | |
May. 7, 20x1 | 2022 Ford F150 | 2315 | $37,893 | |
July 1, 20x1 | Total Beginning Inventory | $132,360 | ||
Purchases | ||||
July 15, 20x1 | 2022 Ford Ranger | 2278 | $23,789 | |
July 15, 20x1 | 2022 Ford Ranger | 2332 | $23,789 | |
July 15, 20x1 | 2022 Ford Super Duty | 3921 | $35,969 | |
Total Purchases | $83,547 | |||
Cost of Inventory Available for Sale | $215,907 | |||
We purchased two 2022 Ford Rangers. However, we didn’t combine them in one entry since both units have unique VINs. In the specific identification method, we always record inventory purchases based on unique identifiers.
Step 3: Transfer the cost to COGS when the item is sold
Let’s assume that the dealership sold the following Ford cars during the third quarter of 20×1.
- On July 13, 20×1, the dealership sold a 2022 Ford Explorer with VIN ending 8952 for $47,437.
- Only September 18, 20×1, the dealership sold a 2022 Ford Super Duty with VIN ending 3921 for $50,389.
Now that we’ve sold cars during the third quarter of 20×1, let’s make another Inventory Quantity Report as of quarter end:
ABC DEALERS INVENTORY QUANTITY REPORT As of July 15, 20x1 | ||||
|---|---|---|---|---|
Date | Description | VIN Ending | Total Cost | |
Beginning Inventory | ||||
Feb. 3, 20x1 | 2022 Ford Explorer | 8952 | $35,139 | |
Feb. 3, 20x1 | 2022 Ford Explorer | 9963 | $31,430 | |
May. 7, 20x1 | 2022 Ford F150 | 8952 | $27,898 | |
May. 7, 20x1 | 2022 Ford F150 | 2315 | $37,893 | |
July 1, 20x1 | Total Beginning Inventory | $132,360 | ||
Purchases | ||||
July 15, 20x1 | 2022 Ford Ranger | 2278 | $23,789 | |
July 15, 20x1 | 2022 Ford Ranger | 2332 | $23,789 | |
July 15, 20x1 | 2022 Ford Super Duty | 3921 | $35,969 | |
Total Purchases | $83,547 | |||
Cost of Inventory Available for Sale | $215,907 | |||
Cost of Goods Sold | ||||
July 13, 20x1 | 2022 Ford Explorer | 8952 | $35,139 | |
Sept. 18, 20x1 | 2022 Ford Super Duty | 3921 | $35,969 | |
Total COGS | $(71,108) | |||
Ending Inventory | ||||
Feb. 3, 20x1 | 2022 Ford Explorer | 9963 | $31,430 | |
May. 7, 20x1 | 2022 Ford F150 | 8952 | $27,898 | |
May. 7, 20x1 | 2022 Ford F150 | 2315 | $37,893 | |
July 15, 20x1 | 2022 Ford Ranger | 2278 | $23,789 | |
July 15, 20x1 | 2022 Ford Ranger | 2332 | $23,789 | |
Total Ending Inventory | $ 144,799 | |||
We recommend updating the report every time a sale or purchase is made. In our example, ABC Dealers have a low inventory volume, so updating the report frequently won’t require a tremendous amount of work.
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 inventory items 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.
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.
