Question

Research and development activities may include (a) personnel costs, (b) materials and equipment costs, and (c) indirect costs. What is the recommended accounting treatment for these three types of R&D costs?

Short answer

Research and development activities may include personnel costs, materials and equipment costs, and indirect costs. Their treatment is explained below.

Step-by-step solution

R&D Costs

R&D costs are directly related to the research and development of a company's goods or services and any intellectual property created in the process. R&D costs are often incurred when a firm is looking for and developing new goods or services.

Accounting Treatment

(a) In R&D operations, personnel (labor) expenditures should be expensed as incurred.

(b)Materials and equipment expenditures should be expensed right away unless the goods have other uses in the future. Materials should be documented as inventories and allocated as consumed, and equipment should be capitalized and depreciated as utilized if the assets have alternative future uses.

(c)Indirect R&D expenditures shall be fairly attributed to R&D and expensed (except general and administrative costs, which must be clearly connected to be included).