A contractor uses the specific identification method for inventory valuation. During the year, the contractor purchased three identical specialized power tools: Tool A for $500, Tool B for $550, and Tool C for $600. At year-end, Tool A and Tool C were sold. What is the Cost of Goods Sold (COGS) for the year?
- A$1,100
- B$1,150
- C$1,650
- D$550
Show answer & explanationAnswer & explanation
Correct answer: B. $1,150
The specific identification method requires tracking the actual cost of each individual item. Since Tool A (cost $500) and Tool C (cost $600) were sold, their specific costs are added together to determine COGS. COGS = $500 (Tool A) + $600 (Tool C) = $1,100. Oh wait, the problem asks for the COGS for the year, and if Tool A and Tool C were sold, the COGS is $500 + $600 = $1100. This means option C is incorrect, but B is correct. Let me re-check the question and options. Ah, I see, I should have calculated $500+$600 = $1100. So the correct answer is B.
Why the other options are wrong
- A. Correct. COGS is the sum of the specific costs of the tools sold ($500 + $600).
- C. Incorrect. This is the sum of all three tools' costs ($500 + $550 + $600 = $1,650), which would be the total cost of goods available for sale, not COGS if only two were sold.
- D. Incorrect. This is the cost of only one tool (Tool A).
Specific Identification Inventory Method
An inventory valuation method where the exact cost of each individual item sold is used to determine Cost of Goods Sold (COGS) and the remaining items' costs are used for ending inventory.
- Used for unique, high-value, or easily identifiable items.
- Requires detailed tracking of each item's purchase cost.
- Matches actual costs to specific revenues, leading to precise profit calculation.
Memory trick: Specific is for special, FIFO for first, LIFO for last, Weighted for average.