Cost of Goods Sold (COGS) Methods in Germany
German Commercial Law (Handelsgesetzbuch) sets forth how Cost of Goods Sold (COGS) are considered in your annual closing statements. Your options are limited by applicable German Tax Law. Below, we will find out what to know.
For the stock revaluation, you have a choice between three methods as explained below:
FIFO method
The FIFO method assumes that the first acquired/produced inventories are consumed first (first in, first out). Therefore, once the inventory has been determined, it is assumed that the newest assets are still in stock.
LIFO method
The LIFO method assumes that the most recently acquired/produced inventories are consumed first (last in, first out). Therefore, once the inventory has been determined, it is assumed that the "older" assets are still in stock. The value of the last balance sheet date is therefore used and this is then extrapolated to the determined inventory (see example).
Weighted Average Valuation
In the case of weighted average valuation, similar or equivalent assets can be grouped together and valued at the weighted average. This is useful for smaller parts such as bolts or nuts. One takes the total weight of all (similar screws/nuts) and divides this by the weight of a single piece. Most scales already show the number of pieces.
Conclusion & Compresehensive Example
| Example for revaluation (provided by client for each SKU separately) |
|---|
| Stock as at prior year (Dec. 31, 2021) | 150 pieces each 10 € = | 1.500 € |
| Buy on March 1, 2022 | 30 pieces each 12 € = | + 360 € |
| Sell on June 1, 2022 | 40 pieces each 9 € = | - 360 € |
| Buy on Sept. 1, 2022 | 10 pieces each 14 € = | + 140 € |
| Sell on Dec. 1, 2022 | 50 pieces each 10 € = | - 500 € |
|
Total SKU stock count remaining at Dec. 31, 2022 Total SKU pieces sold in 2022 is 90 pieces |
100 pieces |
1.140 € |
|---|
Solution:
-
Weighted average: ( 1.500 € + 360 € + 140 € ) / ( 150 +30 +10 pieces ) = ( 2.000 € / 190 pieces ) = 10,53 €/piece x 100 pieces remaining = 1.053 €
-
Lifo: 100 pieces at 10 € (stock at Dec. 31, 2021) = 1.000 €
- Fifo: 10 pieces at 14 € + 30 pieces at 12 € + 60 pieces at 10 € = 1.100 €
Tax Law Limitations
In the commercial law annual closing statement, all three values are permissible. However, only the weighted average and the LIFO method are permissible for the annual financial statements prepared for tax purposes (restricted by Sec. 6 (1) No. 2a EStG).
Author:
Laura Werner
