The method of accounting of research and development costs

The method of accounting of research and development costs to be adopted in basic research costs. Such costs are not linked with any specific product, equipment and method. Moreover, the result of such research are uncertain and may be available in the same year or in the subsequent years or may not be successful at all. Such research costs are treated as an item of specified overhead with reference to the area in which such research falls. Cost of applied research such research costs incurred on specific products may be charged to these products are pre production costs. If the amount of such costs is heavy and it will benefit the production of future years, then it may be treated as deferred revenue expenditure and will be charged to the future production on piece rate basis. Such costs may be partly charged to current production and partly treated as deferred revenue if it is incurred for the improvement of existing products or methods of production. If the research costs are incurred for the purpose of increasing the effective production capability or capacity of the concern, then it is capitalized. Unsuccessful Research and Development the amount spent on unsuccessful research and development is treated as an item of overhead costs provided it is normal and provided for in the budget. If it is not so, then it is written off to profit and loss account in order to protect the cost from such abnormalities. Basic research carried on continuously, if does not produce any tangible results, should be treated as unsuccessful and be treated as an item of overhead.

Research and development on behalf of a customer such costs are either treated as an item of overhead cost or directly charged to customer’s job as it can be directly identified to a particular customer. Research and Development for new product such cost can be treated as deferred revenue expenditure if there is no production during the current period or year and is shown in the balance sheet as fictitious asset. Such expenditure will be charged to profit and loss account on the basis of production of new products in the future period. If production has already started but it is not sufficient to bear the research and development cost then a portion of this may be charged to current production and rest may be treated as deferred revenue expenditure. Research and development for existing products such research and development is carried out to improve and develop the existing product by reducing waste, correcting defects and improving the quality etc. such research costs are charged to the current cost of production treating these as manufacturing or selling overhead depending upon whether such research and development is done for improving production capabilities or the volume of sales. The cost of incomplete research and development work should be carried over to the next year treating it as work in progress on incomplete projects in respect of new projects.