The research and development cost model is used to estimate in detail and then summarize the research and development expense for inclusion in the income statement of the financial projections template.
The costs, sometimes abbreviated to R&D costs, form an important part of a products life cycle, and relate to amounts incurred in developing and designing new products and redesigning existing products for the business, before they go into commercial production.
R&D costs can be found in all businesses, but are particularly important in manufacturing and technology-based businesses or those with significant website development costs or app development costs.
R&D Costs in Accounting
This is not an article on accounting, however, it is important to briefly explain the difference between research and development costs to understand how they might be treated in a financial model.
Research
Research costs are mainly the costs of an investigation into a new product at a very early stage when there is no expectation of future revenue. These costs will always be treated as expenses in the income statement and included in our research and development cost model.
Development
Development costs occur at a much later stage when the product is being made ready for commercial production, where there might be the anticipation of future revenue from the sale of the product. Under certain circumstances, some developments costs can be capitalized and included on the balance sheet of the business as an asset.
Any development costs which have been capitalized need to be written off over their useful life, and while the capital cost itself is not included in our research and development cost model the amortization or depreciation expense is included as a separate line item. Our post on research and development costs provides further explanation.
The aim of this research and development cost model is to accumulate the relevant costs of getting new products to a position where they are ready for commercial production. The type of costs to include will vary from business to business but can generally be separated into staff costs and other costs such as market research studies, pre-production tooling costs, and the cost of prototypes etc.
Using the Research and Development Cost Model
The research and development cost model which is available for download below, is used as follows:
Enter the Staff Position
Enter the title for the staff position. The model should only include staff engaged in research and development activities for the business.
Enter the Start and End Month
For each staff position, enter the start month and the end month. The calculation of the staff cost assumes that the staff member starts on the first day of a month and ends on the last day of a month. So for example, is the start month entered is 1 and the end month is 14, then the model will show a total of 14 months of cost, split 12 months shown in year 1 and 2 months shown in year 2.
Enter the Staff Cost
Enter the annual year 1 staff cost for each position. This would normally be the gross salary for an employee.
Enter the On-costs Percentage
On-costs allow for all the additional costs of a staff member such as employer taxes, healthcare, life assurance, pensions etc. Enter a percentage which reflects the level of on-costs for the business. The percentage is applied to the staff cost before on-costs.
Enter Staff Cost Annual Inflation Rates
Enter the expected annual staff cost inflation rate for years 2 to 4. The percentage is applied to the previous year’s staff cost.
The research and development cost model works out the total staff costs for each year taking into account the start and end months, the base year one staff cost, and the on-cost percentage and inflation rates. The staff headcount is also calculated based on the number of position line items in use at the end of each year.
Enter Other costs
To complete the research and development cost model enter a description and amount for each of the 5 years for each line item to be included under research and development. Other research and development costs include for example the cost of materials and services consumed by R & D activities, depreciation on R & D plant and equipment, overhead costs, amortization of patents and licenses etc.
It should be noted that these amounts are entered manually and are not adjusted by the inflation rates previously entered, which apply only to the staff costs calculation.
Finally, the model calculates the total costs for each of the 5 years. The amounts calculated should now be included under the heading of research and development on the income statement of the financial projections template.
Research and Development Cost Model Download
Our research and development cost model is available for download in Excel format by following the link below.
Users use this research and development cost model at their own risk. We make no warranty or representation as to its accuracy and we are covered by the terms of our legal disclaimer, which you are deemed to have read. This is an example of an R&D cost model that you might use when preparing financial models in Excel. It is purely illustrative of a business plan financial model. This is not intended to reflect general standards or targets for any particular company or sector. If you do spot a mistake in this R&D operational model, please let us know and we will try to fix it.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.