Inventory Valuation Method – Specific Identification Method

Specific Identification Method 

According to this method each item of inventory is identified with its cost. The total of the various costs so identified constitute the value of inventory. This method is generally used when the materials or goods have been purchased for a specific job or customer. Such materials or goods when received are earmarked for the job or customer for whom they are purchased and are issued or sold to the particular job or customer whenever demanded.

This technique of inventory valuation can be adopted only by a company which is handling a small number of items. In case of a manufacturing company having a number of inventory items, it is almost impossible to identify the cost of each individual item of inventory. Thus, this method is inappropriate in most cases on account of practical considerations. Moreover, the method opens door to income manipulation when like items are purchased at different prices. For example, a company purchases.10.000 unitE of an item in equal lots of 2,500 each at costs of Rs 2.50, Rs 3, Ps 3.50 and P.s 4 per unit It sells 7,500 units at Rs 4 per unit. In case the management follows this method for valuation of inventory, it can deiemtine the income reported for the period by selecting that lot of units which will produce the desired objective. If it is assumed that the inventory consists of the last lot purchased, the value of the inventory would be a sum of Rs 10,000 as compared to the presumption that the inventory consists of units purchased in the first lot in which case the value of inventory would be Rs 6,250.