Definition: The specific identification method, also called specific invoice inventory pricing, is a technique used to assign cost to identifiable inventory. In other words, this is a way to value inventory by allocating costs to individual goods when they are purchased and received.
What Does Specific Identification Method Mean?
The specific identification method of assigning costs only works when inventory can be recognized and matched with an invoice or shipping document that clearly shows the cost of the purchase. This is a simple concept. When the inventory arrives, each piece is matched the invoice to allocate the cost.
Obviously, this system relies on two things. The invoice must be detailed and the purchases must be identifiable by model number, serial number, bar code, or RFID chip. An invoice with only totals won’t help divide up the costs. It must be detailed enough to match it with individual items ordered.
Take a retailer for example. Retailers order tons of inventory from wholesalers and manufacturers on a regular basis. Palates of goods can be delivered on a daily basis. Let’s assume an electronics retailer ordered 10 computers. Each computer is slightly different and can be identified by the serial number. The receiving department can unpack the shipment, scan each computer into the system, and assign the total invoice cost to the individual goods.
This system is extremely accurate because each piece of inventory can be tracked separately. There are no estimates involved which make the inventory and cost of goods sold numbers more accurate on the financial statements as well.
Even though this system is extremely accurate, few companies actually use it. There are two main problems with the specific identification method. The first main problem is that the system takes a lot of time and effort. Each piece of inventory must be separately scanned and entered into the system. The second reason is that most goods can’t be separately identifiable. A huge palette of homogenous goods is most like indistinguishable.
Most companies use FIFO or LIFO inventory valuation methods.