The monitoring of conservation properties is essential for model development and for the investigation of the hydrological cycle. This is especially relevant for models that do not solve equations in flux form and do not apply a finite volume discretization. The conservation properties of the mesoscale model COSMO are evaluated by using a finite volume diagnostic approach. That is the subdomain budget of energy, water mass and total mass are diagnosed in a control volume that can be placed at each site in the model domain and is independent of the grid size. Thus, this diagnostic method has the major advantage that it can be applied to realistic simulations. The application of the diagnostic method to the COSMO model reveals a good preservation of the water mass, but large errors in energy and total mass conservation. The analysis shows to which extent errors in the treatment of thermodynamical processes, numerical filters and moisture advection schemes contaminate the subdomain budgets. In this paper we will show that the application of a saturation adjustment scheme under a fixed volume condition is required for models, which use the non-hydrostatic equations and height-based coordinates. Also, a further extension of the model physics will be introduced and discussed for a realistic test case.