There are two reasons in favour of the total cost method
- With the help of the TC-method, the operating result can be determined quickly, even during the year in a short-term income statement. The method provides information on the cost of materials for products already sold in the period under review. It also documents the unfinished and finished products that are still in stock. In essence, the total cost method is therefore a production income statement.(https://www.rechnungswesen-info.de/gesamtkostenverfahren_umsatzkostenverfahren.html). In addition, the total cost method can be easily derived from the financial accounting account system.
- In contrast, the cost of sales method focuses on the cost of sales: How high are the revenues and costs of the products sold in the period under review? The period in which the products were created is not taken into account. If products were created in the period under review that will only be sold in the future, this is also ignored in the calculation. It is not possible to determine which values are in stock during the year.
The HGB permits both variants
According to the HGB, companies have a choice: they can opt for one or the other procedure. Either way, however, they must comply with Section 275 HGB. https://dejure.org/gesetze/HGB/275.html
This prescribes the respective structure of the income statement for both methods. The following items, among others, are provided for the total cost method:
- Increase or decrease in inventories of finished goods and work in progress
- Other own work capitalised
- Cost of materials
- Personnel expenses
- Depreciation and amortisation.
Microsoft Dynamics 365 Business Central only supports UCT
German users of Microsoft Dynamics 365 Business Central have a problem here because these stock movements are not provided for. The system does not provide a standard. In the Anglo-Saxon tradition, the cost of sales method is more widespread.
In the forums, users recommend using the “work in progress” account in Microsoft Dynamics 365 Business Central. However, it is uncertain whether the period reference is always correct.
Workarounds like these are always tricky: They are cumbersome, the informative value of analyses can be limited in individual cases and the risk of errors increases. It is never a good idea to work against a system.
Many companies do not want to do without the short-term income statement and want to be able to say at any time what their stock is worth, for example. On the other hand, they have to comply with the requirements of their parent company or they are active on international markets of their own accord and have to fulfil the standards. US GAAP, for example, prescribes the cost of sales method. They in particular benefit from a system that allows both methods.
TC-method and UCT through Microsoft Dynamics 365 Business Central + “Inventory 365”
The “Inventory 365” app from CKL automatically makes the P&L postings during production. Postings to flexible accounts within the P&L and balance sheet allow flexible analyses and evaluations as early as the financial accounting stage.
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