The total cost method is the dominant method of accounting in Germany. However, certain companies that have been using the total cost method should consider switching to the cost-of-sales method. This is because the cost-of-sales method is becoming an important success factor for more and more companies in view of benefits such as greater efficiency, easier control of the product portfolio and easier international comparability.
Meanwhile, the cost-of-sales method is also possible within the framework of German GAAP accounting. This significantly reduces the conversion effort, as the additional expense associated with a switch to IFRS (International Financial Reporting Standards) is eliminated.
Benefit #1: Better mapping of complex value flows
The more complex the business, the more there is to be said for the conversion to the cost-of-sales method, since complex value flows can be better mapped. Therefore, the cost-of-sales method is an exciting option, especially for companies that are active in the project business and thus have clearly defined cost units. Furthermore, the changeover is worthwhile for companies with high general costs, for example for development or sales, as these functions are shown in the cost-of-sales method according to their origin.
Benefit #2: Efficient portfolio management
The profit contribution of individual projects/products is more transparent, whereupon corresponding portfolio decisions can be made more easily. The cost-of-sales method allocates costs and services according to their source. A direct and detailed allocation is made to the individual project or cost object. This makes the value flows visible.
Benefit #3: Better international comparability
Today, the cost-of-sales method is the global standard for financial reporting. Its use improves international comparability and simplifies the establishment of networks with international partners.
Benefit #4: More meaningful profitability analysis
By reporting on the basis of functions, the profit drivers can be seen quickly and analyzed more easily. For example, the capacity absorption (under/over) becomes apparent in the cost-of-sales method.
Benefit #5: Leaner closing process
The integration of management accounting into financial accounting makes the preparation of financial statements more efficient. After implementing the standardized accounting channels for the cost-of-sales method, the processes are sustainably leaner.
When is the best time to make the switch?
Ideally, the changeover to cost-of-sales accounting should take place at the turn of the fiscal year. In this way, the old fiscal year can still be prepared in the total cost method, while the cost-of-sales method is already being applied in parallel. This makes it possible to check whether both types of financial statements match. If this is the case, the changeover to the cost-of-sales method was successful.
Conclusion: Cost-of-sales method promotes company growth
Realigning reporting with the help of the cost-of-sales method significantly supports companies in achieving their strategic objectives. The cost-of-sales method provides a precise insight into individual projects and cost units, and thus into the overall portfolio. Companies gain transparency regarding the profitability of individual orders and customers. This enables them to prioritize orders and product groups according to profitability. Furthermore, project costs can be better controlled. All in all, the cost-of-sales method is a valuable tool for corporate management and promotes rapid, strategically oriented growth.