January 29, 2022

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Research and Development (R&D) Costs Meaning and Explanations

Research and Development (R&D) Costs Meaning and Key Explanations
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Big companies don’t joke with research and development. R&D costs are an important expense covering an average of 3.5 percent of revenue every year in the United States of America, according to a source. In this article let’s define and explain the term.

Definition of Research Cost

Research cost can be defined as the “cost of searching for new and improved products, a new application of materials, or new or improved methods” (CIMA terminology). That is, it is the cost of looking for new methods of doing things such as new projects or products, new technology, or methods to carry out production processes.

Definition of Development Cost

Development cost is the “cost of 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” (as per CIMA terminology).

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According to ATSWA, the development cost is the cost of research into improving the production of goods and
services.”

Key Explanations of Research and Development Costs

Research and development costs are expenses or expenditures for creating or improving a project, product, or technology to carry out production processes. Although the terms are combined, there is a small difference. Research cost deals with searching for new methods of doing things or a new project or product to create. Or new ways to improve a product’s quality.

Development costs deal with the costs of making that research a reality. It begins with implementing the decision to create a new project or product and ends with the commencement of production. For example, Samsung spends money to research a new type of phone. In the end, they came up with foldable phones. These are the research costs. Upon discovering this new product. The next step is to discover ways to make this product a reality. This will include the cost of making a prototype and conducting test marketing. This makes up the development costs.

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R&D costs are either expended in the profit or loss account immediately or are allotted over several years. If the result of R&D does not result in a new product or project or new technology, as the case may be, then the cost is written off to the profit or loss account. But if the opposite is the case, the R&D cost is charged to the profit or loss statement according to the estimated life cycle of the project, product, or lifetime of the technology.

Conclusion of Research and Development Costs

In final words, research cost is about searching for new ways of doing things that are commercially viable to an organization. While development is the cost of making the research become a reality. In accounting, this cost is charged to the profit or loss account according to the estimated life of the product, project, or technology.

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