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Specific identification is sometimes said to be the ideal method of assigning cost to inventory and...

Specific identification is sometimes said to be the ideal method of assigning cost to inventory and to cost of goods sold. Briefly indicate the arguments for and against this method of inventory valuation.

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Answer #1

Arguments for the specific identification method are as follows:

1. It provides an accurate and ideal matching of costs and revenue because the cost is specifically identified with the sales price.

2. It is realistic method as it adheres to the actual physical flow of goods rather than an artificial flow of cost.

3. Inventory is valued at actual cost instead of an assumed cost.

ARGUMENTS AGAINST THE METHOD

1. The cost of using it restricts its use to goods of high unit value.

2. This method is impractical for manufacturing processes or cases in which units are com-mingled and identity cost.

3. It allows an artificial determination of income by permitting arbitrary selection of the items yo be sold from a homogeneous group.

4. It may not be a meaningful method of assigning cost in periods of changing price level.

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