Publication Date


Document Type


First Advisor

Avery, Clarence G.||Kieso, Donald E.

Degree Name

M.S. (Master of Science)

Legacy Department

Department of Accountancy


Cost accounting


At the present time the majority of industrial firms are accounting for their research and development costs by charging them against income in the period in which the cost is incurred, regardless of whether it is the immediate period or later periods which are expected to benefit from such costs. The purpose of this study was to evaluate the current method of accounting for research and development costs and, where possible, to make recommendations for improvement. This was accomplished mainly through extensive library research. The nature of research and development is such that according to accounting theory it should be capitalized as an asset in the period in which the cost is incurred and later allocated to the periods which are estimated to benefit from these costs. If the defenses given for current practice can be sufficiently refuted, perhaps a step has been taken in implementing the correct method of accounting for research and development costs. Some of the more important defenses which were discussed within the study are: expediency, disguising income fluctuations, conservatism, off-setting errors, recurring costs, taxes, and uncertainty. The uncertainty defense was found to be the main, most valid, defense. Uncertainty can be sub-divided into four sub-uncertainties: the uncertainty of the correct valuation of research and development, the uncertainty of the correct allocation procedure, the uncertainty of the success of the research and development project, and the uncertainty of the correct allocation period. The first two of the above uncertainties are also present with tangible fixed assets. Since they do not prevent the implementation of correct accounting methods for this type of an asset, they need not do so with intangible fixed assets such as research and development. The latter two uncertainties, while presenting more difficulty, can be reasonably offset with increased experience and repetition. In addition to refuting the defenses for current practice, the errors that result from the use of the direct write-off method were cited as further evidence of the necessity of implementing the correct method of accounting for research and development. The prerequisites for such an implementation discussed in the study include a good cost accounting system and competent personnel. The major conclusion of the study was that research and development costs should in practice be capitalized in the year the cost is incurred and later amortized over their estimated useful life. Pure research, since it is subject to the greatest uncertainty, should be written-off over its estimated average life. Applied research and development should be capitalized while the projects are being conducted, but not that portion which is expected to be unproductive. After these projects have been completed, their success and life should be further estimated and the amortization program set accordingly.


Includes bibliographical references.


vii, 103 pages




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