Research and Development and Other Expenses (R&D) Budgeting

Importance R&D in Business  

Research and development (R&D) is a creative task that encompasses broad range of activities in order to discover new information, create innovations or develop new products and technology. It also refers as a creation of new knowledge or applications of existing knowledge to improve products, services and processes. It is not a main part of business functions, but still it is significant for the success of a company (Rashkin, 2007).

There are some situations when R&D is more significant for the growth and success of an organization. The increase in competition, new product development, technological changes as well as decline in sales and market share are some situations, when R&D is important for an organization to survive in competitive environment by improving existing products or process and discovering new innovations (Rashkin, 2007). At present, R&D is important for most of the companies, but it is more important for some companies than other due to nature of business. It is because R&D can be helpful to develop unique products, achieve competitive advantage, enhance reputation and create unique position of brands among the customers. For example, Apple develops unique and innovative products like i-Phones due to its efficient R&D activities (Westeren, 2012).

Acceptable Level of R&D in Business

By considering company’s financial position, potential impacts of research and size of the organization, a manager can ensure an acceptable level of R&D expenses in the business. The type or size of an organization is important issue for the manager when defining the acceptable level of RD in the business. It is because research needs huge amount of investment that is difficult for small size companies to arrange. Along with this, type of business also matters when allocating budget for research expenses. For example, information technology companies like Microsoft, Intel, IBM and Apple requires high level of research in the comparison of retail sector companies to develop more effective and innovative technologies (Thomas, Miller & Murphy, 2011). Due to these reasons, business size and type both matters when making decision about budget for R&D.

Monitor and Control of Necessary Expenses

There are various expenses especially related to R&D, depreciation, dividend payment etc. that are necessary to run a business, but don’t contribute to the bottom line of business. It is because these expenses don’t affect net earnings and cash flow in the business. All these expenses can be monitored and controlled by closely watching trends of each. For example, R&D expenses can be monitored by identifying cost drivers and their impact on overall costs. Along with this, by using Market-Pull model, R&D expenses can be kept under control within the acceptable level (Wissema, 2009). On the other hand, an organization can control its depreciation expenses by revising the estimated life, residual value or both of assets (Jones, Heitger, Mowen & Hansen, 2011).  

Permissible Expenses in Budgeting

There are some expenses in the business that should have maximum amount of leeway or scope in budgeting because of their potential contribution in the company’s success. Expenses related to R&D, advertisement and promotion, and new equipments purchasing are three major expenses that should have maximum freedom to move within limits in budgeting. It is because the development of new products or improvement in existing product or services needs to perform R&D activities that force companies to allocate more budgets in this regard (Hansen, Mowen & Guan, 2009).

Along with this, due to changes in technologies and rise in competition, most of the companies especially related to manufacturing, service and technological sectors need to upgrade their technologies by implementing new equipments and systems. In this situation, companies require to allocate additional budgets for the purchasing of new technology (Mowen & Hansen, 2010). On the other hand, cost of marketing is also a necessary expense in the business in order to promote products or services, compete with other brands and increase sales. Due to this reason, most of the companies make changes in their advertising expenses according to market condition and competitor’s marketing strategy (Bragg, 2005). All these arguments indicate why marketing, R&D and equipments expenses should have greatest amount of scope in budgeting.

References

Bragg, S.M. (2005). Controller’s Guide to Planning and Controlling Operations. USA: John Wiley & Sons.

Hansen, D.R., Mowen, M.M & Guan, L. (2009). Cost Management: Accounting and Control (6th ed.). USA: Cengage Learning.

Jones, J.P., Heitger, D.L., Mowen, M.M & Hansen, D.R. (2011). Cornerstones of Financial and Managerial Accounting (2nd ed.). USA: Cengage Learning.

Mowen, M.M & Hansen, D.R. (2010). Cornerstones of Cost Accounting. USA: Cengage Learning.

Rashkin, M.D. (2007). Practical Guide to Research and Development Tax Incentives: Federal, State, and Foreign (2nd ed.). USA: CCH.

Thomas, B., Miller, C & Murphy, L. (2011). Innovation and Small Business – Volume 1. Bookboon.

Westeren, K.L. (2012). Foundations of the Knowledge Economy: Innovation, Learning and Clusters. Britain: Edward Elgar Publishing.

Wissema,J.G. (2009). Towards the Third Generation University: Managing the University in Transition. Britain: Edward Elgar Publishing.