specific identification method

How To Calculate Specific Identification Method?

Finance 5 Mins Read February 29, 2024 Posted by Nabamita Sinha

Since we are talking about inventory calculation and valuation, it is always best to switch up your valuation method after every few months. Specific identification method can be the best option for you. You should never stick to one method for long, or else the results might be inaccurate in most cases.

So today, I am going to talk about a specific identification method, what it is and how you are going to implement it.

What Is The Specific Identification Method?

The specific identification method is an inventory calculation and valuation method that helps in tracking each specific item in the inventory. It also assigns costs to each of them instead of grouping them up together.

What Is The Specific Identification Method?

This is the type of manner you would normally see for FIFO or LIFO methods of inventory. The cost of each of the goods in a period of time is calculated specifically.

  • A specific identification method means you are keeping track of each and every item in your inventory. And also, assign a specific cost to each item other than just grouping them up together.
  • This type of inventory is very helpful and useful when a company is able to keep track of and identify each and every product.
  • The main problem with the specific identification method is that you need to be able to track and identify each product in your inventory. And also to keep track of their cost and introduce them during sales.
  • Specific lot identification method is something to use for tax lots.

If you are using specific identification method for large enterprises, then it would work best if you have electronic tags for each item. Or if you have individual stickers or serial numbers, it will also work.

It is important to note that, in specific identification method, you need to assign a price to each of the purchased items individually. And it should also be noted that each item should be easily tracked when the promise of sale is made.

How Does The Specific Identification Method Work?

There are a number of ways by which different businesses implement this method. Few of them use trackers, while others may use stickers or serial numbers of each number.

While there are companies that prefer the old-school techniques of physically tracking and checking each of the items. There are employees who keep a record of each item on a piece of paper and catalogue them.

What Are The Benefits Of The Specific Identification Method?

If you are thinking of using specific identification method for your inventory, then here are a few benefits of it.

Benefits Of The Specific Identification Method

1. Accurate Accounting

If you are using specific Identification method, then it is guaranteed that your business is getting an accurate valuation of your inventory. It also classifies each and every product individually and not as a group.

With an accurate valuation, the accuracy of stock records also increases. This prevents the companies from losing inventory. It also helps to understand the sales data and increase the overall company profit.

2. Greater Ability To Account For Your Profit

Through this Specific identification method, it makes it easier for companies to determine which products are profit-making. This information comes in handy when making business strategies.

3. Easier To Track Heterogeneous Items

If you have a heterogeneous product line, then this type of specific individual method is the best possible way to do inventory. This way, you can establish the costs individually other than grouping different items together.

What Does The Specific Identification Method Require?

Here are a few things that specific identification method require to give out an accurate valuation of the products.

 Specific Identification Method Require

1. To Track And Record Each Item Individually

For the specific identification method to work properly, it is very important that your business is able to track and record each and every item individually. Each of these items has a certain value to it that helps to assess the total value of the inventory.

2. To Track And Record The Cost Of Each Item Individually

Even though you are able to track and record each item, then also it is not enough. You need to attach a certain cost to each item in order to prepare the total valuation of the whole inventory.

Specific Identification Method: How To Calculate It?

Now let?s see how to calculate the specific identification method formula for calculating the total valuation of the inventory.

Let?s take for example:- 

Date Transaction Price
01.07.2022 Purchased 1000 units 1.10
08.07.2022 Purchased 500 units 1.20
22.07.2022 Purchased 700 units 1.30
31.07.2022 Purchased 900 units 1.25

Now for the solution:-

Date of Purchase Purchased Quantity (A) Unit sold out of purchased quantity(B) Balance (A-B=C) Price (D) Closing Stock (C*D)
01.07.2022 1000 400 600 $1.10 $660.00
08.07.2022 500 200 300 $1.20 $360.00
22.07.2022 700 200 500 $1.30 $650.00
31.07.2022 900 300 600 $1.25 $750.00
TOTAL 3100 1100 2000 $2,420.00

Frequently Asked Questions (FAQs):

1. What Is An Example Of Specific Identification Method?

A specific identification method is a type of tracking method for inventory items. It evaluates each and every item in the inventory. Or to work properly, each item in the inventory needs to have either a serial number, tracker or sticker.

2. Who Uses Specific Identification Method? 

This type of inventory valuation method is used by companies that have high sell heterogeneous products. And they need to closely monitor the inventory process and track their sales rate.

3. Is FIFO A Specific Identification Method?

FIFO or First In First Out is the default method while selling your products to brokerages, the Gainskeeper, or even the IRS. FIFO sells your oldest inventory first. With the use of specific identification method, you can track the items you are selling.

Wrapping Up!

Now that you know what specific identification method of calculating your inventory item means, you can easily apply that to your business as well. It is one of the most crucial methods of inventory calculation.

The specific identification method is one of the best ways of doing inventory calculations. If you have the resources and items to tag each product, then the inventory process becomes very easy to conduct and carry out.

You can even carry out specific identification methods of calculation if you have employed to check each product.

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Nabamita Sinha loves to write about lifestyle and pop-culture. In her free time, she loves to watch movies and TV series and experiment with food. Her favorite niche topics are fashion, lifestyle, travel, and gossip content. Her style of writing is creative and quirky.

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