Research and Development Costs

Research costs

Accordingly to the Chartered Institute of Management Accountants (CIMA), London, ‘research cost’ is “the cost of searching for new or improved products, new application of material or new improved methods.” The research may be carried out departmentally by the research staff of the organisation or it may be done by a specialized research agency employed for the purpose.

Research may be of any of the following types:

(i) Basic research: It is done to investigate into the possibilities of technological development and improving stock of basic knowledge in the know-how of technical process. The research is of a general nature and the costs involved are also of recurring nature. It should, therefore, be charged as a production overhead.

(ii) Applied research: This is concerned with application of basic research knowledge for the introduction or improvement of products, production methods and techniques. The costs incurred for the above purposes can be identified with specific product or processes and therefore they can be directly charged to such products or processes. In case the costs are heavy, they may be charged as deferred revenue expenditure. In the event of the project providing to be a failure, the balance of the costs not recovered may be charged to costing profit and loss account.

Development costs

According to C.I.M.A. London, development cost is the “process which begins with the implementation of the decision to produce a new or improved product or to employ a new or improved method and ends with the commencement of formal production of that product or by that method.”

Development costs are therefore the expenditure incurred for putting the results of research on a practical commercial basis. It starts when the research ends. It is, as a matter of fact, the bridge between research and production. For example, if the research reveals that it is scientifically and technically feasible to manufacture a particular product according to a particular manufacturing process and of a particular design, trial production of that product will be made to test whether manufacturing of that product on a commercial basis would be sound or not.

The development costs may be charged as specific product costs as revenue expenditure of the period in which they have been incurred. In case they are quite heavy, they may be charged as deferred revenue expenditure over a period, generally not exceeding three years. In case the product is later on abandoned, the balance not written off may be charged to costing profit and loss account.

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