Specific identification inventory valuation method is a way of keeping track of all items in an inventory individually. As opposed to LIFO, or FIFO, which groups pieces of inventory together based on when they were purchased and how much they cost, the specific identification inventory valuation method goes a step further and keeps individual track of every single item in the inventory from the time it enters inventory until the time it leaves. It is tagged for the specific cost associated with purchasing it and any additional costs incurred until it is sold.
Specific identification inventory valuation is often used for larger items such as furniture or vehicles. It is used for items that have widely differing features and costs associated with those features. Occasionally, it can be used to identify specific securities as well. This method of identification allows investors to reduce or offset capital gains by picking a specific lot of securities to be used as the basis for a sale.
Breaking Down Specific Identification Inventory Valuation Method
Specific identification inventory valuation is used to track specific items through the inventory-to-sales channel, including the specific costs associated with that item of inventory. It is used for items that are large and have differing characteristics.
Example of Specific Identification Inventory Valuation Method
For example, suppose that Jane has a car dealership and has 50 cars on the lot. Each of those cars have different features and therefore have a different cost associated with them when Jane purchased them for her inventory. She will track each of those cars individually from the time they enter her lot until they are sold. When dealing with securities, specific identification can be used as well for tax harvesting. Let's say Jane owns 1,000 shares of ABC company, a volatile small-cap manufacturer. She bought 400 shares at $40 per share, 300 shares at $60 per share and the remaining 300 shares at $20 per share. Jane then sells 300 shares at $70 per share. Using the method described above, Jane can match the shares she sold with the 300 shares she purchased at $60 per share because the cost of specific securities is easy to identify.