Specific Identification Method

Specific Identification Method Overview

As I learned during this chapter, the specific identification method requires the business to identify each unit of their inventory with its cost and retain that identification until the inventory is sold. Once the specific unit is sold, the cost of the specific unit is assigned to the cost of goods sold. Assume that Apple gives every iPhone a specific serial number, and records these numbers in an inventory management system. While Apple sold an iPhone, the system matches each serial number to its record to recognize its cost. 

Specific Identification Method Requirements

Be able to track each inventory item individually, such as paper labels, serial numbers, or unique numbers to identify each product.

Tracking the cost of each unit which means clearly identify the cost of each purchased item, and associate it with a unique identification.

Advantages and Disadvantages

These days, we have advanced information technology, computers and programs generate a barcode for each unit in inventory. In other words, It's not impossible. But the problem is, does it is necessary and greater than the other methods? It needs tons of storage space and cloud computing, and all of these cost money to maintain, another operating expense to pay. If it makes no sense to be an improvement in the financial report and management, it becomes a waste. For instance, assume that a cloud services company offering such services, but they charge the purchaser $100 per TB(1,000GB) and $3,000 monthly management fee. If your bookstore needs 1,000 TB to storage and operating with their algorithm, you will be charged $103,000 ($3,000 + $100 x 1,000) per month. Suppose your profits are around $10 per unit, the service expense has already offset your 10,300 units on the amounts of sales. On the other hand, if you are selling a Lamborghini Urus(A SUV) at $399,000, and the profit is $150,000 per car. The service expense just costs you 1 unit of your sales and It's 10,300 times less than the bookstore's space used to store that information. It is also very time-consuming to track inventory on an individual unit basis. Therefore, specific identification is suggested only used for uniquely identifiable goods that have a fairly high per-unit cost (Luxury cars, fine jewelry, or houses ).

The specific identification method provides a high degree of accuracy to the cost of inventory since the exact cost at which something was purchased can be identified, and connecting to the cost of goods sold when the related item is sold.

Example

In Taiwan, a big construction company called Huaku which holds a lot of building inventory. Each building, house, or other real estate, has its own specific name. They track each case individually by those specific names, and identify the cost of each built item, and associate it with the unique names. For instance, they built an apartment named “Huaku Sky Garden” and "Huaku Sky Lake" for sale. The Huaku Sky Garden and Huaku Sky Lake are two very different buildings and houses. Just like you can not sell the house in Alaska and then value its cost with the house in California or New York City. In the Huaku Sky Garden and Huaku Sky Lake cases, the cost of inventory is only valued by each apartment itself.

Retail Inventory Method

To estimate their ending inventory balances, the method is based on the relationship between the cost of the merchandise and its retail price. But be careful that the method is not entirely accurate, and periodically adjusted by physical inventory count is needed. As such, this method is normally for retailers to deal with their sales of small items since a hard count is often impractical. Retailers can attempt to estimate inventory levels and the cost of inventory based on the total cost and retail value of goods available for sale and the total sales over a certain period.

To calculate the cost of ending inventory using the retail inventory method:

1.The cost-to-retail percentage = Cost / Retail price.

2.The cost of goods available for sale = Cost of beginning inventory + Cost of purchases

3.The cost of goods sold = Sales × cost-to-retail percentage

4.The ending inventory = Cost of goods available for sale - Cost of sales during the period

For instance, Eslite bookstore sells Harry Potter for an average of $20, and it costs $14. This is a cost-to-retail percentage of 70%. Suppose Eslite bookstore’s beginning inventory has a cost of $100,000 it paid $180,000 for purchases during the month, and it had sales of $240,000. The ending inventory is $112,000 :

$100,000(Beginning inventory) + $180,000(Purchases) - $168,000(Sales of $240,000 x 70%) = $112,000(Ending inventory)

Retail Method? The Advantages and Disadvantages

The retail inventory method is a quick and easy way to determine an approximate ending inventory balance. However, It's only an estimate, not a physical inventory count. It only works if the business has a consistent mark-up across all products sold. If the mark-up was different, the results of the calculation will be incorrect.