CSLB Law & Business ExamBusiness FinancesMedium
A contractor uses the specific identification method for inventory valuation. During the year, the contractor purchased three identical specialized insulation rolls at different costs: Roll A for $500, Roll B for $550, and Roll C for $600. If the contractor sells Roll C to a customer, what is the Cost of Goods Sold (COGS) for that sale?
- A$550
- B$600
- CThe average cost of the three rolls.
- D$500
Show answer & explanationAnswer & explanation
Correct answer: B. $600
The specific identification method requires tracking the actual cost of each individual item of inventory. Since Roll C, which cost $600, was sold, its actual cost of $600 becomes the Cost of Goods Sold.
Why the other options are wrong
- A. This would be if Roll B was sold.
- C. This describes the weighted-average method, not specific identification.
- D. This would be if Roll A was sold, or if FIFO was used and Roll A was the first purchased.
Specific Identification Inventory Method
An inventory costing method that tracks the actual cost of each individual item in inventory, and matches that specific cost to the revenue generated when the item is sold.
- Used for unique or high-value items.
- Provides the most accurate matching of cost to revenue.
- Impractical for large volumes of identical, low-cost items.
Memory trick: LIFO-FIFO-WAC-SPEC: Last In, First Out; First In, First Out; Weighted Average Cost; Specific Identification.