Management Accounting for R&D Costs to measure product profitability in a company providing sheet metal fabrication machinery and industrial lasers.
This work provides practical insights into management accounting for R&D costs by developing an approach for incorporating R&D costs in a product profitability calculation in a medium-sized company. Design alternatives are preselected based on an analysis of the objectives of the company towards the new reporting tool. Questions discussed consider the practicality of capitalizing vs. amortizing of R&D, and absorption costing vs. direct costing in an operational as well as strategic context. Afterwards available alternatives are analyzed in-depth on the basis of defined criteria, such as effort required, communicability, and precision. Regarding the last criterion, a Monte Carlo simulation is set-up based on parameters determined in the company. Besides a practical close-up on management accounting approach offered by the paper, results show that concerns regarding the usability and precision of capitalized and piecewise depreciated R&D costs might be exaggerated under specific conditions.