Research And Development (R&D) Cost


R&D cost is forgone economic resources to finance research and development activities to aid in changing technology in production or in any other way to make output more appealing.

The R&D cost element is based on the step or stage when the good or service has reached the maturity stage where by the chances of the product declining from the market is high. So, at this stage, research and development resources are utilized to identify new product designs that can be acceptable in the market by making the product more appealing. Such costs are classified as research and development costs and examples are the cost of discovering new ideas, process, products by experiment and implementing such results on a commercial basis.

Cost Of Discovering New Ideas

Definition of discovering new ideas is the forgone economic resources by the firm to finance discovering of new products. These endeavors eliminate the business risk of becoming obsolete by meeting the cost of researching on which product ad in diversifying the market.

Advantages Of R&D Cost

  1. Development of more marketable products

    Investment in R&D aid in developing new products which cut above those of the competitors hence they sell more and the firm stands a better position of avoiding market stagnation.

  2. Increase in revenue

    The newly developed products are selling above the rest and this generates more revenue for the organization.

  3. Opportunity to seek for external grants

    Any attempt to develop a new product through research and development attracts interested parties who want to be partakers of the outcomes thereof. Hence the firm can get funding from those volunteers.

  4. Tax amnesty

    Most of the economies don’t charge taxes on expenses associated with R&D. In most countries, it is a tax allowable expense hence charged in the profit and loss account as a business expense. This is a relief to the firm.

  5. Linkage and collaboration

    R&D investment attracts other stakeholder contributions in terms of ideas and inputs which boost the firm towards achieving its full potential. It allows for the transfer of skills and knowledge, and access to facilities, expertise and potentially new ideas that would otherwise be out of reach of your business.

  6. Good name for the firm

    Investment in R&D is a sure way of building good reputation t the company which translate into various advantages such as retention of employees of high quality and productivity. 

Disadvantages Of R&D Cost

  1. Risk of R&D efforts back firing

    Efforts of research on a new product may not materialize hence losses are incurred which become sunk costs.

  2. Costly for small firms.

    R&D investment may not be economical especially to the small organizations which may have a financial challenge in financing the project

  3. Concentration focus may not be much researched

    Some firms focus on certain products which are not much focused on by R&D oriented firms. So, such firms do not benefit in any way.

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.