5.2 Specific Identification Method
Inventory Valuation Method¶
The Specific Identification Method¶
The specific identification method assigns a specific cost to each individual item in inventory. This method is used when each item can be uniquely identified, such as with serial numbers, barcodes, or other tracking systems.
Example: Inventory at the End of June¶
Assume a company has 300 units in inventory at the end of June. Using the specific identification method, it's determined that:
- 100 units were purchased in June at ₹250/unit.
- 200 units were purchased in May at ₹220/unit.
Calculating Closing Inventory Value¶
The closing inventory value is calculated by multiplying the number of units from each purchase by their respective purchase prices and then summing the results:
(100 units * ₹250/unit) + (200 units * ₹220/unit) = ₹25,000 + ₹44,000 = ₹69,000
Therefore, the closing inventory value is ₹69,000.
Calculating Material Consumption (Cost of Goods Sold in Manufacturing)¶
In a manufacturing context, the cost of goods issued to the production department is often referred to as "material consumption." This is analogous to the cost of goods sold (COGS) in a merchandising business.
If the total purchase value (across all periods) is ₹840,000, then the material consumption can be calculated as follows:
Total Purchase Value - Closing Inventory Value = Material Consumption
₹840,000 - ₹69,000 = ₹771,000
Therefore, the material consumption is ₹771,000.
Suitability of the Specific Identification Method¶
The specific identification method is most suitable under the following conditions:
- Small Number of Units: When the inventory consists of a relatively small number of high-value items. This makes tracking each item feasible.
- Unique Identification: When each item can be uniquely identified using serial numbers, barcodes, or other tracking technologies.
- High-Value Items: When the cost of individual items is significant enough to justify the effort of tracking them individually. Examples include:
- Jewelry
- Automobiles
- Real estate
- Custom-made goods
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