In: Accounting
Describe the specific identification inventory cost method. Explain and provide three examples of real life inventory that would be used for the specific identification inventory cost method.
Under the specific identification inventory cost method, each item of the inventory is separately identified and valued at its independent cost. The cost of goods sold also comprises of the total cost of each separate inventory item sold. Detailed item-wise inventory records are required to be maintained under this method. The cost of the inventory under the specific identification method exactly matches with the actual movement or flow of the inventory. Hence this method is a highly accurate method of inventory valuation. The specific identification inventory cost method is suitable for use where there is a small number of inventory items, each distinguishable and separately identifiable from the other items. It is typically used for high value items.
Examples of use of specific identification method would be for valuation of jewellery, where each piece of jewellery is separately identified, its costs separately accumulated and its movement is independently tracked.
Art works is another example where specific identification would be used for identifying and recording costs, tracking movement of items and recording the cost of sales and inventory.
It would also be used for customised furniture items where the cost of each piece is different and separately tracked along with its movement or flow.