Question

Which of the following is a reason why the specific identification method may be considered ideal for assigning costs to inventory and cost of goods sold?

a. The potential for manipulation of net income is reduced.
b. There is no arbitrary allocation of costs.
c. The cost flow matches the physical flow.
d. Able to use on all types of inventory.

Answer 1

The specific identification method is ideal for assigning costs since it directly ties cost to each inventory item, eliminates arbitrary cost allocation, and accurately tracks cost flow.

Step-by-step explanation:

The specific identification method of inventory costing is considered ideal in certain situations because it directly ties the cost of an inventory item to its physical sale. This method makes it possible to precisely match costs with revenues, leading to an accurate representation of Cost of Goods Sold (COGS). However, one of the primary reasons this method is appreciated lies in its ability to eliminate arbitrary cost allocation. There is no need to distribute costs among inventory items, which can otherwise be arbitrary when using methods like FIFO or LIFO. Because costs are tied to specific items, the company can track the actual cost flow of each item they sell.