Specific identification is a method of finding out
ending inventory cost.
It requires a detailed physical count, so that the company knows exactly how many of each good bought on specific dates comprise the year-end inventory. When this information is found, the amount of goods are multiplied by their purchase cost at their purchase date, to get a number for the ending inventory cost.
In theory, this method is the best method, since it relates the ending inventory goods directly to the specific price they were bought for. However, this method allows management to easily manipulate ending inventory cost, since they can choose to report that the cheaper goods were sold first, hence increasing ending inventory cost and lowering
cost of goods sold
Cost of goods sold (COGS) is the carrying value of goods sold during a particular period.
Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. ...
. This will increase the income. Alternatively, management can choose to report lower income, to reduce the
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
es they needed to pay.
This method is also very hard to use on interchangeable goods. For example, it is hard to relate
shipping
Freight transport, also referred as ''Freight Forwarding'', is the physical process of transporting commodities and merchandise goods and cargo. The term shipping originally referred to transport by sea but in American English, it has been ...
and
storage costs to a specific inventory item. These numbers will need to be estimated, hence reducing the specific identification method's benefit of being extremely specific. Thus, this method is generally limited to large, high-ticket items which can be easily identified specifically (such as tract houses).
See also
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Inventory
Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation.
Inventory management is a discipline primarily about specifying the sha ...
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Weighted average cost
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Moving-average cost
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FIFO and LIFO
References
#Intermediate Accounting 8th Canadian Edition, page 445, Kieso, Weygandt, Warfield, Young, Wiecek, John Wiley & Sons Canada, Ltd, 2007, {{ISBN, 978-0-470-83979-9
Inventory