The specific identification inventory method is a way of determining 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.
Specific Identification Inventory Method Example
By way of illustration.
Suppose a business has total purchases for the year of 59 units with a total value of 16,790 made up as follows:
- January 9 Purchased 12 units @ 250 per unit
- March 14 Purchased 20 units @ 275 per unit
- July 23 Purchased 8 units @ 300 per unit
- Oct 8 Purchased 19 units @ 310 per unit
Using the specific identification method of inventory valuation, the business records ending inventory of 23 units as being from the following purchases, January 9, 1 unit; March 14, 2 units; July 23, 5 units; October 8, 15 units.
Under the specific identification method the cost of the ending inventory is calculated as shown in the following table:
| Purchase Date | Units | Unit Value | Value |
|---|---|---|---|
| January 9 | 1 | 250 | 250 |
| March 14 | 2 | 275 | 550 |
| July 23 | 5 | 300 | 1,500 |
| October 8 | 15 | 310 | 4,650 |
| Ending | 23 | 6,950 |
Assuming there was no opening inventory, the cost of goods sold (COGS) must now be equal to the difference between the goods purchased of 16,790 and the ending inventory of 6,950, which is 9,840. This can be seen from the table below:
| Purchase Date | Units | Unit Value | Value |
|---|---|---|---|
| January 9 | 11 | 250 | 2,750 |
| March 14 | 18 | 275 | 4,950 |
| July 23 | 3 | 300 | 900 |
| October 8 | 4 | 310 | 1,240 |
| Ending | 36 | 9.840 |
The specific identification inventory method is one of the available methods used in inventory management. Clearly the method used to determine which units are sold and which remain in closing inventory determines the value of the cost of goods sold and the closing inventory. As profit depends on the cost of goods sold, the method chosen will affect the profits of a business.
Other methods of determining inventory movements included FIFO (first in first out), the LIFO (last in first out), and the average cost method.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. 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.