The specific identification method is a method of accounting for inventory and cost of sales where the exact item is matched to the sale.
The specific identification method can be used when companies sell high priced items that can be easily identified and tracked. For example, the specific identification method would be appropriate for firms selling automotives, jewelry, or appliances.
The specific identification method is not practical for firms which purchase and sell many indistinguishable inventory items. Such firms must either use a “cost flow assumption” method or use the weighted-average method. The two cost flow assumption methods are the first-in, first-out (FIFO) method and the last-in, last-out (LIFO) method. Under the FIFO method, the firm assumes the oldest acquired inventory items are the first units sold. Under the LIFO method, the firm assumes the most recently acquired inventory items are the first units sold. With the weighted-average inventory method, the firm calculates an average unit cost which is applied to inventory and cost of sales.
As an example of the specific identification method, suppose that a company sells lawn tractors. In a given week, the company sells three lawn tractors. The tractors were acquired for $2,000, $2,200, and $2,500. The company sells the tractors for $3,000, $3,300, and $3,750 respectively. What are the sales, cost of sales, and gross profit for the week?
Total sales for the week are: $3,000 + $3,300 + $3,750 = $10,050
When the company sells each tractor, the company recognizes in cost of sales the corresponding cost for the tractor being sold. The total cost of sales for the week is: $2,000 + $2,200 + $2,500 = $6,700. The total profit for the week is $10,050 – $6,700 = $3,350.
