Specific Identification Valuation Method

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  The specific identification inventory valuation method is used to track each and every item in your inventory individually.  This includes the time it enters the inventory until the time it leaves it.  Let’s not get confused here, specific identification is different from LIFO and FIFO.  LIFO and FIFO  groups pieces of inventory together based on when they were purchased and how much they cost, while specific identification identifies and tracks every piece of inventory individually.  The specific inventory method tags or marks each item with its purchase cost and any additional costs that are incurred in the transformation process until it is sold. 

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Why Use Specific Identification Valuation?
  Before we do that, we need to remind you to always speak with a CPA, professional accountant or an accounting attorney.  While we can share information on this method of valuation, they can give you specifics that will fit your needs.  ​

1. The first reason a company may choose to use specific identification is because of the cost of the item.  For example, you would not want to identify and track every move of low profit inventory.  However, you may want to consider this method for larger and more expensive items. 
2. While many types of valuation are not directly linked to the physical movement or location of the inventory, specific identification is to a certain extent.  For example, items that have different features may need to be identified in a specific way so that costs can be tracked and they can be pulled from inventory easily. 
3. The final reason we will share comes from an Investopedia Article Entitled: Specific Identification Inventory Valuation Method by Will Kenton and you can click the link here to visit the article.  Quoting from the article, “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.”  One last thing to note about specific identification is that this form of inventory valuation takes much more work to keep information organized and trackable.

Example

• Let’s say you own a manufacturing plant.  At your plant you do assembly as well.  Many of the parts look identical but require different methods of processing which changes the cost.  As such, each of your parts is tracked individually from the time they enter the lot until they are sold.  In this scenario, the benefits are clear. The owner of the plant gets far more information about the unique parts and the different accessories and features that are most popular with its customers.   
  

Challenge:

• We would like to know, do you use specific identification?  If so, what tips and tricks do you use to track items?  Share your thoughts in the community, comments or upcoming assignments and receive a coupon for one of Lean Strategies International LLC's Training Courses.

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