What Is the Specific Identification Inventory Valuation Method?
The specific identification inventory valuation method is a system for tracking every single item in an inventory individually from the time it enters the inventory until the time it leaves it. This distinguishes the method from LIFO or FIFO, which groups pieces of inventory together based on when they were purchased and how much they cost.
In the specific inventory method, each item is tagged with its purchase cost and any additional costs that are incurred until it is sold.
Understanding Specific Identification Inventory Valuation Method
Specific identification inventory valuation is often used for more expensive items such as furniture or vehicles. It also is used when the products stored have widely different features and costs.
- The specific identification inventory valuation method is used to track each purchase and its price individually.
- When used for inventory management, it provides more useful information on sales.
- When used for tracking investments, it can reduce capital gains taxes due.
Occasionally, it is used to identify specific securities. 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.
Obviously, this inventory method takes more work upfront than the alternatives. It might not be a reasonable use of time for a seller of t-shirts or candles. But it could be very useful to a seller of a wide variety of merchandise who wants a steady stream of information on what products or styles are in demand, what's not selling, and what needs restocking.
In addition, it has practical uses in accounting. It makes it easy to calculate the ending inventory cost. That figure tells the company the total annual expenses associated with all unsold goods in its inventory. It also provides a highly accurate figure for the cost of goods sold.
Examples of Specific Identification Inventory Valuation Method
Suppose a car dealership has 50 cars on the lot. Each car has a different dealer cost and a different sales price based on the model and its features. Each of the cars is tracked individually from the time they enter the lot until they are sold.
In this case, the benefits are clear. The owner of the dealership gets a far more useful stream of information about the models and the features that are most popular with its customers.
This level of detail also can be useful for tax harvesting. Say an investor owns 1,000 shares of ABC company, a volatile small-cap manufacturer. It includes 400 shares purchased for $40 per share, 300 shares at $60 per share, and the remaining 300 shares at $20 per share.
The investor then sells 300 shares at $70 per share. At tax time, using the method described above, the investor can easily match up the shares sold for $70 with the most expensive of the shares purchased (for $60 per share). The taxable capital gains due are thus minimized.