Specific Identification Method Overview
The specific identification method refers to the tracking and costing of inventory based on the movement of specific, identifiable inventory items in and out of stock. This method is applicable when individual items can be clearly identified, such as with a serial number, stamped receipt date, or RFID tag.
Specific Identification Method Requirements
The principle requirements of a specific identification tracking system are:
- Be able to track each inventory item individually. The easiest method is a durable metal or paper label that contains a serial number. Alternatively, a radio frequency identification tag can contain a unique number that identifies the product.
- Be able to track the cost of each item individually. The accounting system should clearly identify the cost of each purchased item, and associate it with a unique identification number.
- Be able to relieve inventory for the specific cost associated with an inventory item when it is sold.
These requirements can be achieved with a simple accounting system, possibly just an electronic spreadsheet, which makes the specific identification method applicable to smaller businesses (especially when unit volumes are low).
Specific Identification Method Advantages and Disadvantages
The specific identification method introduces a high degree of accuracy to the cost of inventory, since the exact cost at which something was purchased can be recorded in the inventory records, and charged to the cost of goods sold when the related item is sold.
However, this method is rarely used, because there are few purchased products that are clearly identified in a company's accounting records with a unique identification code. Thus, it is typically restricted to unique, high-value items for which such differentiation is needed. Most organizations instead sell products that are essentially interchangeable, and so are more likely to use a FIFO, LIFO, weighted average, or similar system.
It is also very time-consuming to track inventory on an individual unit basis, which restricts its use to smaller inventory quantities.
Examples of Specific Identification Method Usage
Examples of situations in which the specific identification method would be applicable are a purveyor of fine watches or an art gallery.