P4: Specific Identification | ACCOUNTING ESSENTIALS

🎯 Learning Objectives

Understand when specific identification is appropriate vs. cost flow assumptions
Calculate COGS and ending inventory using actual specific costs
Identify industries and products suitable for specific identification
Compare specific identification to FIFO, LIFO, and weighted average methods
Apply specific identification to unique inventory items

📚 Background & Principles

Specific Identification is an inventory costing method where each item's actual cost is tracked and matched with revenue when that specific item is sold. Unlike FIFO, LIFO, or weighted average (which are cost flow assumptions), specific identification matches actual costs to actual items.

Core Principle: When inventory items are unique or high-value, averaging or assuming cost flow is inappropriate. Each item carries its own cost, and when sold, that specific cost becomes COGS.

This method provides the most accurate matching of costs to revenue but requires extensive tracking and is practical only for items that can be individually identified.

💡 Key Insight: Think of specific identification like selling houses on a street. House #123 sold for $500,000, and we know exactly what the builder paid for that specific lot and materials. House #124 is still for sale at $510,000. We don't average them—we track each individually.

🔑 Key Concepts

Specific Identification

Inventory costing method tracking actual cost of each individual item, matching exact cost to revenue when sold.

Individual Tracking

Each inventory item has a unique identifier (serial number, VIN, lot number) linking to its specific cost.

Actual Cost Matching

When an item sells, its exact purchase cost is recorded as COGS—no averaging or assumptions.

Appropriate Products

Unique, high-value items where tracking costs is justified: jewelry, art, automobiles, real estate.

Income Manipulation Risk

Companies can select which specific items to sell, potentially affecting reported income.

Cost Flow Assumption Alternative

Specific identification is an alternative to FIFO, LIFO, and weighted average when items are not homogeneous.

🔍 Deep Dive

Explore Specific Identification at different levels of depth:

🟢 Foundational Level

Understanding the "Diamond Ring" analogy.

The Jewelry Store Example

Analogy: Unique Diamonds

Two diamond rings look similar to customers, but they have different specs:

💍

Ring A

2-carat diamond

$5,000

💎

Ring B

3-carat diamond

$10,000

Key Point:

You CANNOT average these to $7,500. When Ring A sells for $8,000, COGS is exactly $5,000 (not average).

📦 Item A

$5,000

→

💰 Sold

COGS = $5,000

→

📦 Item B

$10,000

🟡 Standard Level

Calculation and application examples.

Automobile Dealership Example

Given Inventory:

Car #1 (VIN-001): $25,000 cost, $32,000 selling price

Car #2 (VIN-002): $28,000 cost, $35,000 selling price

Car #3 (VIN-003): $22,000 cost, $30,000 selling price

Scenario 1: Car #1 and #3 Sold

COGS = $25,000 + $22,000 = $47,000

Ending Inventory = Car #2 at $28,000

Scenario 2: Car #1 and #2 Sold

COGS = $25,000 + $28,000 = $53,000

Ending Inventory = Car #3 at $22,000

Key Insight:

Different ending inventory values depending on WHICH specific cars were sold! This gives companies some discretion over income.

🔴 Advanced Level

Method comparison and ethical considerations.

Comparing All Four Methods

Same Inventory: 10 units @ $10, 20 units @ $12, 15 units @ $15, 12 units ending

Method	Ending Inventory	COGS
FIFO (newest costs)	$180	$385
LIFO (oldest costs)	$124	$441
Weighted Average	$150.72	$414.28
Specific ID (varies)	Varies	Varies

✅ Advantages

Most accurate cost matching
Reflects actual inventory flow
Ideal for unique, high-value items
Gives precise financial information

⚠️ Disadvantages

Complex and expensive to implement
Requires tracking each item
Potential for income manipulation
Not practical for homogeneous goods

🏢 Industries Using Specific Identification

Specific identification is practical when items are unique and tracking costs is justified.

💍

Jewelry & Gems

Each stone has unique carat, clarity, color, cut. Tracked by individual certificates.

🚗

Automobiles

Each vehicle has unique VIN, options, packages, and specific invoice cost.

🏠

Real Estate

Each property is unique by location, condition, and improvements. Sold as individual units.

🎨

Art & Collectibles

Paintings, sculptures, antiques each have unique provenance and specific acquisition costs.

🚫 Common Misconceptions & Professional Tips

❌ Misconception 1: "Specific identification is always more accurate than cost flow assumptions."

✅ Reality: Specific identification is more accurate for UNIQUE items. For homogeneous goods (wheat, oil, identical electronics), cost flow assumptions like FIFO are actually MORE practical and appropriate.

❌ Misconception 2: "Specific identification eliminates all subjectivity."

✅ Reality: Companies using specific identification can CHOOSE which identical-looking items to sell. This allows manipulation of COGS and income within the constraints of what's available.

❌ Misconception 3: "Specific identification can be used for any inventory."

✅ Reality: Specific identification is only practical and appropriate when items are unique and can be individually tracked. For mass-market identical products, it's impractical and unnecessary.

💡 Professional Tip 1: When implementing specific identification, invest in barcoding or RFID systems. Manual tracking of individual items is error-prone and costly at scale.

💡 Professional Tip 2: Establish clear policies about which specific items to sell when multiple similar items exist. This prevents allegations of income manipulation.

💡 Professional Tip 3: For mixed inventories (some unique, some homogeneous), consider using specific identification for unique items and weighted average for homogeneous goods.

🧠 Memory Aids & Quick Reference

⚡ Quick Recall: Specific Identification Rule

Each item = Its actual cost

When sold → That specific cost goes to COGS

When remains → That specific cost stays in inventory

Best for: Unique, high-value, trackable items

💎 Unique Items

Each item has different cost. Track individually by serial number or ID.

📊 Exact Matching

Actual cost matches actual item sold. No averaging or assumptions.

⚠️ Manipulation Risk

Companies can select which items to sell, affecting income.

💰 High Cost to Implement

Extensive tracking required. Only justified for high-value items.

📖 Glossary

Specific Identification

Inventory costing method tracking actual cost of each individual item and matching that exact cost to revenue when sold.

Serial Number Tracking

Assigning unique identifiers to each inventory item for tracking its specific cost through the system.

VIN (Vehicle Identification Number)

Unique identifier for automobiles linking to specific options, features, and acquisition cost.

Homogeneous Inventory

Identical or interchangeable inventory items where specific tracking is impractical. Better suited for weighted average.

Cost Flow Assumption

Method for assigning costs to COGS when specific items cannot be traced. FIFO, LIFO, and weighted average are cost flow assumptions.

Income Manipulation

Risk in specific identification where companies can select which specific items to sell to affect reported income.

Lot Number Tracking

Grouping inventory by production batch or purchase lot, each with specific cost. Middle ground between individual and average tracking.

Actual Cost Method

Another name for specific identification, emphasizing that actual costs (not assumed or averaged) are used.

Specific Identification