A company is most likely to utilize the specific identification method if its inventory consists of

The practice of keeping track of each specific item in inventory and assigning cost individually instead of grouping items together

What is the Specific Identification Method?

The specific identification method relates to inventory valuation, 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 inventory, track their cost, and produce them upon sale or the promise of sale.

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.

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)® 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)
• Economic Order Quantity (EOQ)
• LIFO vs. FIFO
• Operating Cycle