Proper allocation of R&D costs aids businesses in determining how much they are actually spending on R&D-related activities. The proper allocation of costs makes it easy for firms to budget and measure the performance of their projects and keep better accounting records. An effective allocation process will also assist in separating out those costs that qualify as development costs and those that do not.
Establish Clear Cost Categories
Allocation efficiency can be achieved through the creation of well-defined cost categories in relation to the costs incurred during the process of R&D. It is important to record such costs as labor costs, material costs, capital equipment, software costs, contracting services, and others specifically rather than categorizing them into large groups.
Categories used in the cost recording process must be updated from time to time to make sure that the process remains realistic. Changes in projects may require changes in the way of costing activities. Therefore, some expenses will become obsolete, while new types of expenses will appear.
Track Employee Time Carefully
The labour of the company’s employees can make up a substantial share of the costs of the research and development process; therefore, the proper time tracking is essential. The company should keep track of the way the time of its employees is allocated to the various activities including the R&D activities, administration, manufacturing, and other activities. Good records will help in better allocating the costs of labour to relevant projects.
The time tracking should be done consistently during the whole year instead of retroactively after the beginning of the reporting period. Both the employees and the managers will be able to check whether the record of the projects is correct. In addition, companies cooperating with the SR&ED consulting services can get recommendations on keeping necessary documentation for the cost allocation to the R&D activities.
Separate Shared Costs
Certain resources may be deployed in multiple projects, thus complicating the cost allocation process. Equipment, software costs, laboratory space, and technical professionals may facilitate multiple R&D operations within the same period of time. Companies are encouraged to develop reasonable means of splitting such costs on the basis of actual use or some other objective criteria.
It is important to document how the allocation process is carried out to ensure uniformity among accountants. Thus, equipment-related costs may be split based on the amount of time of use, and some costs related to certain software may be split based on the number of users for each project.
Maintain Supporting Documentation
Documentation is important in helping businesses establish whether there is evidence regarding how the expenses incurred on research and development were calculated. Invoices, payroll information, project budgets, time spent on the project, purchase orders, contracts, and technical information may be used in proving the relationship between the expenses incurred and the activity carried out.
The business should also make sure that the financial and project documents match each other. This means that if the expense has been allocated to one development project, the documentation will contain sufficient information regarding why this was done. Organizations such as G6 Consulting can assist businesses in reviewing their documentation.
Review Allocation Methods Regularly
Allocation of R&D expenses can be reconsidered as projects, personnel, and business operation strategies are reevaluated. An effective approach for a small research and development team will become impractical as the number of projects increases or the company shares resources among departments. Such review would help to spot allocation approaches that no longer correspond to business activity.
Businesses can check the allocated expenses against the budget and actual expenses as well. The discrepancies in those amounts can suggest misclassified expense, improper allocation of shared costs, or incompleteness of project documentation.
Improve Communication Between Teams
Cost allocation will only be effective where there is an effective mode of communication between the accounting department and the people overseeing the R&D activity. The accounting department will know about the classification of costs, while the technical department will be aware of the utilization of labor, equipment, and materials. Combining the two can help to achieve accurate allocation of costs.
Communication will also prevent misunderstandings when changes happen during the course of the project. In case the project is growing, stopping or changing phases, it is important for the accounting department to be aware of it in order to assign costs effectively.
There is potential to increase the precision of allocating R&D costs through the use of well-defined cost classifications, time records, segregating shared costs, and thorough documentation. Constant monitoring and communications between the accountants and the R&D personnel will go a long way in minimizing errors during the course of a project. A standardized procedure of allocating costs provides reliable accounting information and good documentation.