How does the specific identification method work for inventory costing?

Specific identification is the simplest inventory costing method conceptually, but it is only practical for certain types of inventory.

How it works: Each individual item in inventory is tracked to its actual purchase cost. When that specific item is sold, its actual cost becomes COGS. There is no cost flow assumption — you are matching the literal cost to the literal item.

Example: Prescott Fine Jewelers has three diamond rings in inventory:

• Ring A: purchased for $4,200
• Ring B: purchased for $5,800
• Ring C: purchased for $3,900

If a customer buys Ring B, COGS is exactly $5,800. No assumptions are needed because each ring is uniquely identified.

When is it appropriate?

Specific identification works best for:

• High-value, low-volume items (jewelry, art, luxury cars, custom machinery)
• Items with unique serial numbers or characteristics
• Real estate development (individual lots or units)

It is not practical for:

• Fungible goods (commodities, oil, grain)
• High-volume retail (thousands of identical widgets)
• Items where individual tracking is cost-prohibitive

Advantages and disadvantages:

The manipulation concern: Because management chooses which specific item to "sell," they can cherry-pick high-cost or low-cost items to manage reported COGS and profit. For instance, if Prescott wants to report higher profit on a sale, they might designate Ring C ($3,900 cost) as the item sold even if the customer physically receives Ring B.

IFRS and GAAP: Both standards permit specific identification. IAS 2 requires it for items that are not ordinarily interchangeable. For interchangeable items, IFRS requires FIFO or weighted average (LIFO is prohibited under IFRS).

CFA exam relevance: Specific identification appears occasionally, usually in the context of comparing it to cost flow assumptions or identifying its manipulation risk. Know that it gives the most accurate COGS but opens the door to earnings management.

Explore more inventory topics in our CFA Level I FRA course.