Accounting of such cost gives rise to many problems

Accounting of such cost gives rise to many problems which are due to such expenditure is in nature of pre- production cost and there is too much time lag between the incurred of expenditure and getting benefit. Either the production is nil or it is so small that becomes difficult to charge such costs to the cost of products. Because of these difficulties, there is lack of general agreement regarding the treatment of such costs in cost accounts. There are main methods which can be used for the recovery of such costs.

Charge to current period on revenue basis – Research and development costs being a function of production, can be directly charged to the cost of goods sold of specific products to recover through the general overhead rates treating as overhead costs. Charging such costs to cost of goods sold of current period or not is a matter of controversy. Whether such costs should be capitalized or charged to the current revenue depends on two factors ie. The nature of expenses included in the costs and the objective and likely result of such research and development. If the research is contributing to the general efficiency and growth of the business and not for the benefit of a particular department and is undertaken for bettering the result of the concern by finding out improved materials, methods, processes handling methods etc. and for developing additional product , then such costs may be charged to the costs of current revenues.

Amortizing on long term basis by capitalization- If the research and development cost is incurred for a specific  product or process, and there is little or no production during the current period, then it is desirable not to charge such costs to current cost of production. If it is expected to drive the benefit of such research and development on large term basis, the expenditure may be capitalized and a suitable amount may be charged to costs like depreciation on fixed assets.

Amortizing on short term basis – If the benefits of research and development are to be derived  only for a short period of two three years, then such costs may be treated as depreciable cost. A portion of the total amount spent is written off to profit and loss account and the balance is shown as fictitious assets and carried over in the balance sheet to be written off in the subsequent years.