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How do I Determine the Appropriate R&D Investment?

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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 23 August 2016
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Research and development (R&D) is quite common in many businesses, especially those in the manufacturing and production industries. To calculate the appropriate R&D investment for a project, companies must create a plan or theory for developing a product, explore options for production, develop and test the production method, implement the plan full scale, and study the overall effectiveness of the entire process. This is commonly known as the R&D cycle. Each step will include a cost for materials, facilities, labor, and other minor expenses. The total of these items will result in the total investments.

Theorizing about a product is looking at the current economic market and finding a niche or gap in consumer products. Developing products to fill this unmet need can result in consumer demand for new products or services. This first stage of R&D helps companies plan how much money to spend on investing in new business operations. National accounting standards may allow for the company to capitalize (book as an asset) a portion of the R&D investment. This plays significant role in the decision of which projects to pursue so the company can maintain its net income during the development stage.

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The R&D process hinges on a company’s ability to find available resources at a relatively low acquisition cost. The appropriate R&D investments include the cost for materials, freight to ship goods to the company, and the purchase of any equipment needed to transform the materials into finished consumer products. This process involves the use of management accountants who will perform standard cost accounting for determining the cost of individual goods and services. Accountants will prepare internal cost reports to ensure each R&D investment cost is accounted for and the project remains under budget.

Many companies will carve out a portion of their overall budget for the R&D investment process. This allows for the improvement of goods and services, or the opportunity to diversify operations into other business industries and sectors. This ensures the company does not overspend on projects that do not add value to the company’s operations. R&D investment budgets may continue on for several years. For example, pharmaceutical companies will often spend a majority of their capital on developing new drugs. Each project is subject to an ongoing review process where the company will determine how well the project is progressing, and if the new drugs meet government specifications. Projects who fail to operate within these constraints will often be abandoned.

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