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Sorry, there are no results matching your search., ifrs vs. us gaap: r&d costs.

The accounting for research and development costs under IFRS can be significantly more complex than under US GAAP.

IFRS Perspectives: Update on IFRS issues in the US

Companies often incur costs to develop products and services that they intend to use or sell. The accounting for these research and development costs under IFRS can be significantly more complex than under US GAAP

Under US GAAP, R&D costs within the scope of ASC 730 1  are expensed as incurred. US GAAP also has specific requirements for motion picture films, website development, cloud computing costs and software development costs.

Under IFRS (IAS 38 2 ), research costs are expensed, like US GAAP. However, unlike US GAAP, IFRS has broad-based guidance that requires companies to capitalize development expenditures, including internal costs, when certain criteria are met.

Based on these criteria, internally developed intangible assets (e.g. development expenses related to a prototype in the automotive industry) are generally capitalized and amortized under IFRS and expensed under US GAAP. This difference gives rise to two complexities in applying IFRS: distinguishing development activities from research activities, and analyzing whether and when the criteria for capitalizing development expenditures are met.

Separating development from research

The starting point for companies applying IFRS is to differentiate between costs that are related to ‘research’ activities versus those related to ‘development’ activities. While the definition of what constitutes ‘research’ versus ‘development’ is very similar between IFRS and US GAAP, neither provides a bright line on separating the two. Instead, a company needs to develop processes and controls that allow it to make that distinction based on the nature of different activities.

Analyzing when to start capitalizing development costs

Expenditures incurred in the development phase of a project are capitalized from the point in time that the company is able to demonstrate all of the following.

• The technical feasibility of completing the intangible asset so that it will be available for use or sale.
• Its intention to complete the intangible asset and use or sell it.
• Its ability to use or sell the intangible asset.
• How the intangible asset will generate probable future economic benefits.
• The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
• Its ability to reliably measure the expenditure attributable to the intangible asset during its development.

In our experience, the key factor in the above list is  technical feasibility . There is no definition or further guidance to help determine when a project crosses that threshold. Instead, companies need to evaluate technical feasibility in relation to each specific project. Projects related to new product developments are generally more difficult to substantiate than projects in which the entity has more experience.  

To learn more about the differences between IFRS and US GAAP, see KPMG’s publication,  IFRS compared to US GAAP .

• ASC 730, Research and Development
• IAS 38, Intangible Assets

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What Is Cost Accounting?

Understanding cost accounting.

• Types of Costs
• Cost vs. Financial Accounting

The Bottom Line

• Corporate Finance

What Is Cost Accounting? Definition, Concept, and Types

Cost accounting is a managerial accounting process that involves recording, analyzing, and reporting a company's costs. Cost accounting is an internal process used only by a company to identify ways to reduce spending.

Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being wasted or lost.

Key Takeaways

• Cost accounting is the reporting and analysis of a company's cost structure.
• Cost accounting involves assigning costs to cost objects that can include a company's products, services, and any business activities.
• Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost.
• Having a clear idea of the costs associated with running a business makes it easier for management to boost profitability.
• Cost accounting is distinct and separate from general financial accounting, which is designed for outside audiences and heavily regulated.

Even though cost accounting is commonly called a costing method, the scope of cost accounting is far broader than mere cost. Costing methods determine costs, while cost accounting is an analysis of the different types of costs a company incurs.

Cost accounting has elements of traditional bookkeeping, system development, creating measurable information, and input analysis. For many firms, cost accounting helps create and measure business strategy in a more organic way.

Having a clear idea of the costs associated with running a business essentially makes it easier for management to devise ways to maximize productivity and profitability. Entrepreneurs and business managers rely on actionable information before making allocation decisions. Cost accounting buoys decision-making because it can be tailored to the specific needs of each separate firm.

Modern methods of cost accounting first emerged in the manufacturing industries, though its advantages helped it spread quickly to other sectors.

How Cost Accounting Is Used

Cost accounting can be applied to many areas of a business. Here are some examples of how it is used.

Cost Controls

Cost accounting is used to help with cost controls. Firms want to be able to spend less on their inputs and charge more for their outputs. Cost accounting can be used to identify inefficiencies and apply the necessary improvements needed to control costs. These controls can include budgetary controls, standard costing, and inventory management .

Internal Costs 

Cost accounting can help with internal costs, such as transfer prices for companies that transfer goods and services between divisions and subsidiaries. For example, a parent company overseas might be the supplier for its U.S. subsidiary, meaning the U.S. company would be charged by the parent for any purchases of materials.

Expansion Plans

Companies looking to expand their product line need to understand their cost structure. Cost accounting helps management plan for future capital expenditures , which are large plant and equipment purchases.

Preparing Financial Statements

Cost accounting can contribute to preparing required financial statements, an area otherwise reserved for financial accounting. The prices and information developed and studied through cost accounting will likely make it easier to gather information for financial accounting purposes. For example, raw material costs and inventory prices are shared between both accounting methods .

Types of Costs in Cost Accounting

Businesses can incur many types of costs depending on their industry. Here are a few of the most common costs involved in cost accounting.

Direct Costs

A direct cost is a cost directly tied to a product's production and typically includes direct materials, labor, and distribution costs. Inventory, raw materials, and employee wages for factory workers are all examples of direct costs.

Indirect Costs

Indirect costs can't be directly tied to the production of a product and might include the electricity for a factory.

Variable Costs

Costs that increase or decrease with production volumes tend to be classified as variable costs . A company that produces cars might have the steel involved in production as a variable cost.

Fixed Costs

Fixed costs are the costs that keep a company running and don't fluctuate with sales and production volumes. A factory building or equipment lease would be classified as fixed costs.

Operating Costs

Operating costs  are the costs to run the day-to-day operations of the company. However, operating costs—or operating expenses—are not usually traced back to the manufactured product and can be fixed or variable.

Cost Accounting vs. Financial Accounting

Financial and cost accounting systems can be differentiated based on their target audiences. Financial accounting is designed to help those who don't have access to inside business information, such as shareholders, lenders, and regulators. For example, retail investors who analyze financial statements benefit from a company's financial accounting.

Alternatively, cost accounting is meant for those inside the organization responsible for making critical decisions. Unlike financial accounting for publicly traded firms, there is no legal requirement for cost accounting.

Cost accounting is distinct and separate from general financial accounting, which is regulated by the Securities and Exchange Commission and the Financial Industry Regulatory Authority and is critical for creating financial statements.

What Are the Advantages of Cost Accounting?

Cost accounting is helpful because it allows executive management of companies to understand how to use their resources more effectively by tracking and measuring them and studying their effects.

What Is the Main Difference Between Cost Accounting and Financial Accounting?

Cost accounting is for inside use. It helps company management to make decisions and is tailored to the specific needs of each separate firm. This differs from financial accounting, which must follow a set template and is used to inform people outside the company, such as investors, about its financial performance.

What Are the 4 Types of Cost Accounting?

There are various forms of cost accounting. They include:

• Standard cost accounting
• Activity-based cost accounting
• Marginal cost accounting
• Lean accounting

Keeping on top of costs is essential for businesses. The objective is to maximize profitability; achieving that goal depends greatly on managing costs.

That’s essentially what cost accounting is designed to do. It helps managers and employees keep track of the costs associated with running the business, which is information that makes it easier to boost efficiency and profitability.

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Accounting for Sustainability—Could Cost Accounting Be the Right Tool?

• First Online: 01 April 2020

Cite this chapter

• Franco Ernesto Rubino 7 &
• Stefania Veltri 7  

Part of the book series: CSR, Sustainability, Ethics & Governance ((CSEG))

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The last few decades have witnessed the increasing pressures for organizations to behave in a socially and environmentally responsible fashion, and businesses have started to acknowledge the importance of sustainability, embracing the sustainability rhetoric in their external reporting and in their mission statement. One area that has not yet been investigated in depth is related to the capability of existing corporate accounting systems to measure sustainability. Development of such instrumental sustainability accounting systems will require the accounting profession to step outside its comfort zone and measure and manage external environmental and social impacts. Extending the boundary of analysis beyond the “entity” has implications for both accounting and management control system design. The chapter intends to intervene in the lively debate in literature about the usefulness and capability of corporate accounting systems to address sustainability optimally by taking into consideration positive and negative positions as regards the sustainability of accounting. It also aims to imagine if and how an accounting for sustainability might emerge and what possibilities could arise for accounting in light of a sustainability science approach.

While the chapter is the result of a joint effort of the authors, the individual contributions are as follows: Franco Rubino wrote Sects. 3 , 4 and 6 ; Stefania Veltri wrote Sects. 1 , 2 and 5 .

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Rubino, F.E., Veltri, S. (2020). Accounting for Sustainability—Could Cost Accounting Be the Right Tool?. In: Del Baldo, M., Dillard, J., Baldarelli, MG., Ciambotti, M. (eds) Accounting, Accountability and Society. CSR, Sustainability, Ethics & Governance. Springer, Cham. https://doi.org/10.1007/978-3-030-41142-8_5

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This article explains the accounting treatment for research and development (R&D) costs under both UK and International Accounting Standards. Both UK and International Accounting Standards recognise the importance of accounting for R&D, but take a different viewpoint as to the method used

WHY SPEND MONEY ON R&D?

Many businesses in the commercial world spend vast amounts of money, on an annual basis, on the research and development of products and services. These entities do this with the intention of developing a product or service that will, in future periods, provide  significant amounts of income for years to come.

THE ACCOUNTING PREDICAMENT

If, in the future, economic benefit is expected to flow to the entity as a result of incurring R&D costs, then it can be argued that these costs should be treated as an asset rather than an expense, as they meet the definition of an asset prescribed by both the Statement of Principles and the IASB Framework for the Preparation  and Presentation of Financial Statements.

Equally, the argument exists that it may be impossible to predict whether or not a project will give rise to future income. As a result, both the UK and International Accounting Standards provide accountants with more information in order to clarify the situation.

INTANGIBLE ASSETS

Intangible assets are business assets that have no physical form. Unlike a tangible asset, such as a computer, you can’t see or touch an  intangible asset.

There are two types of intangible assets: those that are purchased and those that are internally generated. The accounting treatment of purchased intangibles is relatively straightforward in that the purchase price is capitalised in the same way as for a tangible asset. Accounting for internally-generated  assets, however, requires more thought.

R&D costs fall into the category of internally-generated intangible assets, and are therefore subject to specific recognition criteria under both the UK and  international standards.

R&D – DEFINITIONS

Research is original and planned investigation, undertaken with the prospect of gaining new scientific or technical knowledge and understanding. An example of research could be a company in the pharmaceuticals industry undertaking activities or tests aimed at obtaining new knowledge to develop a new vaccine. The company is researching the unknown, and therefore, at this early stage, no future economic benefit can be expected to flow to the entity.

Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services, before the start of commercial production or use. An example of development is a car manufacturer undertaking the design, construction, and  testing of a pre-production model.

UK TREATMENT OF R&D

So far we have established that expenditure on R&D can fall into the category of intangible assets. Under UK accounting standards, intangible assets are accounted for using the rules from FRS 10, Goodwill and Intangibles .

Even though R&D can be an intangible asset in the UK, accounting for R&D is governed by its own accounting standard – SSAP 13, Accounting for Research and  Development .

Recognition  

Research SSAP 13 states that expenditure on research does not directly lead to future economic benefits, and capitalising such costs does not comply with the accruals concept. Therefore, the accounting treatment for all research expenditure is to write it off to the profit and  loss account as incurred.

Development As a basic rule, expenditure on development costs should be written off to the profit and loss account as incurred, as with the expenditure on research. However, under SSAP 13, there is an option to defer the development expenditure and carry it forward as an intangible asset if the following criteria are met: 

• there is a clearly defined project
• expenditure is separately identifiable
• the project is commercially viable
• the project is technically feasible
• project income is expected to outweigh cost
• resources are available to complete  the project.

If these criteria are met, the entity may choose to either capitalise the costs, bringing them ‘on balance sheet’, or maintain the policy to write the costs off to the profit and loss account. Note that if an accounting policy of capitalisation is adopted it should be applied consistently to all development projects that  meet that criteria.

Treatment of capitalised development costs SSAP 13 requires that where development costs are recognised as an asset, they should be amortised over the periods expected to benefit from them. Amortisation should begin only once commercial production has started or when the developed product or service  comes into use.

Every capitalised project should be reviewed at the end of every accounting period to ensure that the recognition criteria are still met. Where the conditions no longer exist or are doubtful, the capitalised costs should be written off to the profit and loss  account immediately.

Problems with SSAP 13 SSAP 13 is not in line with the newer International Accounting Standard covering this area. As seen previously, the UK allows a choice over capitalisation; this can lead to inconsistencies between companies and, as some of the criteria are subjective, this ‘choice’ can be manipulated by companies wishing to  capitalise development costs.

INTERNATIONAL TREATMENT OF R&D

One notable difference between the UK and international treatment is that the UK has a separate standard for the treatment of R&D (SSAP 13), whereas under International Accounting Standards the accounting for R&D  is dealt with under IAS 38, Intangible Assets .

Recognition   IAS 38 states that an intangible asset is to be recognised if, and only if, the following criteria  are met:

• it is probable that future economic benefits from the asset will flow to the entity
• the cost of the asset can be reliably  measured.

The above recognition criteria look straightforward enough, but in reality it can prove to be very difficult to assess whether or not these have been met. In order to make the recognition of internally-generated intangibles more clear-cut, IAS 38 separates an R&D project into a research phase and a development phase.

Research phase It is impossible to demonstrate whether or not a product or service at the research stage will generate any probable future economic benefit. As a result, IAS 38 states that all expenditure incurred at the research stage should be written off to the income statement as an expense when incurred, and will never  be capitalised as an intangible asset.

Development phase Under IAS 38, an intangible asset arising from development must be capitalised if an entity  can demonstrate all of the following criteria:

• the technical feasibility of completing the intangible asset (so that it will be available  for use or sale)
• intention to complete and use or sell  the asset
• ability to use or sell the asset
• existence of a market or, if to be used internally, the usefulness of the asset 
• availability of adequate technical, financial, and other resources to complete  the asset
• the cost of the asset can be measured  reliably.

If any of the recognition criteria are not met then the expenditure must be charged to the income statement as incurred. Note that if the recognition criteria have been met,  capitalisation must take place.

Treatment of capitalised development costs Once development costs have been capitalised, the asset should be amortised in accordance with the accruals concept over its finite life. Amortisation must only begin when commercial production has commenced (hence matching the income and expenditure  to the period in which it relates).

Each development project must be reviewed at the end of each accounting period to ensure that the recognition criteria are still met. If the criteria are no longer met, then the previously capitalised costs must be written off  to the income statement immediately.

EXAMPLE A company incurs research costs, during one year, amounting to $125,000, and development costs of $490,000. The accountant informs you that the recognition criteria (as prescribed by both SSAP 13 and IAS 38) have been met. What effect will the above transactions have on the financial statements when following either the UK or International Accounting Standards? (See  'Related links' for the solution.)

Bobbie Retallack is a lecturer at Kaplan  Financial in Birmingham, UK

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• Published: 16 September 2021

Implementation of strategic cost management in manufacturing companies: overcoming costs stickiness and increasing corporate sustainability

• Mohammad Mahdi Rounaghi   ORCID: orcid.org/0000-0002-9640-678X 1 ,
• Hajer Jarrar 2 &
• Leo-Paul Dana 3  

Future Business Journal volume  7 , Article number:  31 ( 2021 ) Cite this article

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In today's competitive world, three factors: price, quality and time have critical roles in the success of the companies to achieve success in the competition. For this purpose, the companies have to also adapt themselves to changes in technology and environment. Strategic cost management is the best way to improve the sustainable management models in the manufacturing companies. Strategic cost management has solved many of the problems and shortcomings of traditional accounting system and by accurate determination of costs, their proper allocation to products and elimination of waste, tries to create value for shareholders by using continuous improvement. The objective of this paper was to develop a management model called strategic cost management that reduced costs stickiness and increased corporate sustainability. Using strategic cost management approach can create competitive advantage for the companies, because it provides accurate cost price information so that the users can easily understand the information. The aim of the paper by introducing strategic cost management was to contribute toward accurate pricing, which could result in the increased profitability and competitiveness of the manufacturing companies in a highly competitive global market and at a market‐based price. Also, due to the growing competition among companies in providing high quality products with reasonable prices, a precise system of measurement of the cost of the product is necessary.

Introduction

In recent years, economic analysis in the planning process and in the monitoring process of the production process shows that three factors: price, quality and time have critical roles in the success of the companies to achieve success in the competition. The world faces the problem of integration between sustained business functions. The sustainability data are not sufficiently integrated. To solve this problem, organizations need information systems to facilitate their sustainability initiatives [ 1 , 2 ]. Also, businesses and academics worldwide agree regarding the benefits of sustainable development (SD). Improving reputation and branding and increasing revenues by reducing costs are the primary strategic objectives of any entity [ 3 , 4 ]. In this paper, we introduce the strategic cost management approach that helps manufacturing companies for overcoming the costs stickiness and monitoring the life cycle of products and it introduces integrated sustainable development system for manufacturing companies.

Strategic cost management is a process connecting financial management, cost management and strategic management. It involves cost optimization and financial resources preparation which are needed to achieve desired strategic market position in cost effective manner. The importance of managing costs and aligning them with the business strategy of an entity is critical especially in the midst of challenging economic times faced by businesses today. Traditionally companies have been under pressure to cut cost in the short-term without really thinking about sustainable change, impact on the people and integration with the overall business strategy. In the current business environment of increased global competition, new markets, increasing regulation and changing demographics, successful companies are changing their approach to cost structuring and control.

Over the last decade, research in management accounting has challenged the fundamental assumption that cost behavior is symmetric for activity increases and decreases. Cost behavior is an important issue in cost accounting and management accounting, as it widely affects decision-making processes. Moreover, several techniques generally used by managerial accountants and financial analysts depend mainly on cost behavior, such as conventional ABC, cost estimation and cost-volume-profit analysis. Quality management (QM) has been widely viewed as a management paradigm that enables firms to gain a competitive. Therefore, overcoming on cost stickiness is a critical issue for mangers of manufacturing companies. Also, understanding cost behavior is an essential element of cost and management accounting [ 5 – 8 ].

Cost stickiness, also referred to as asymmetric cost behavior, is a well-documented result of managerial discretion underlying the development of corporate cost compared to changes in firm activity. Managers’ decisions to maintain the resource allocations due to product market competition can be costly, especially during periods of sales decreases. Under the traditional model of cost behavior, costs are assumed to be either fixed or move proportionately and symmetrically with sales changes. The traditional model of cost behavior distinguishes between fixed and variable costs and posits a proportional relation between variable costs and underlying activity levels. Understanding sticky cost behavior is important and has direct benefits for the economy as it provides useful information to managers making decisions on cost control and to external stakeholders (e.g., financial analysts) assessing firm performance. As the global economy integrates and competes, strengthening cost management and operational efficiency becomes increasingly important to firms’ survival and development [ 9 – 14 ].

Cost management is an important part of business management in the manufacturing industry. The degree of cost management implementation is a comprehensive index to measure the level of enterprise management. In particular, firms with limited access to capital have higher costs of securing external financing during the capacity expansion periods, which increases the upward adjustment costs. When activity decreases, firms with limited access to capital may suffer more decrease in the present value of revenue generated by a marginal capacity, as these firms have higher opportunity cost of capital and thus higher discount rates compared to firms with better access to capital. Therefore, we hypothesize that limited access to capital not only reduces contemporary capacity expansions associated with sales increases, but also weakens the degree of cost stickiness when sales decrease [ 15 , 16 ].

On the other hand, cost management is an important part of business management in the manufacturing industry. The degree of cost management implementation is a comprehensive index to measure the level of enterprise management. From investors’ perspective, investors depend on the published financial statements prepared by the management that are based on available information regarding the determinants of cost behavior. From financial analysts’ perspective, predicting cost behavior is an essential part of earnings prediction [ 16 – 18 ].

In many production firms, it is common practice to financially reward managers for firm performance improvement. For decades, firms have devoted to improving the speed and efficiency of material and information flows in the supply chain, acknowledging the importance of time-based competitive advantage in the dynamic business environment. As one of the key factors in decision-making process, the evolution of product price passes critical information. Managing costs by utilizing resources effectively is regarded as fundamental to success in today's competitive environment. Cost behavior as “sticky” if costs increase more for activity increases than they decrease for an equivalent activity decrease. Sticky behavior is the result of decisions made by managers when activity decreases. When activity drops, the manager must decide whether to (a) maintain committed resources and bear the cost of unutilized capacity at least in the short-term or (b) immediately reduce committed resources and incur potentially large retrenching costs in the current period and, if activity increases in the future, incur further costs to replace resources. Traditional accounting cost models assume that fixed costs are independent of the level of activity and variable costs change proportionately with changes in the level of activity. In the common traditional model of the behavior of costs, which is generally accepted in accounting literature, costs are usually divided into two categories of fixed and variable ones in terms of changes in activity level: fixed occupants are variable. Most management accounting texts assume that unit variable costs are linear and proportional to changes in activity and that fixed costs are fixed. The proportionality and symmetry between costs and activity implies that a 1% increase in activity results in a 1% increase in costs, and a 1% decrease in activity results in a 1% decrease in costs. Stickiness might also be conditioned by existing capacity [ 5 , 19 – 26 ].

Notions of cost behavior are a key element in management accounting [ 27 ]. There are two main views about the existence of expense stickiness: rational decision-making and motivational. The rational decision-making view treats expense stickiness as a consequence of management rationally choosing between alternatives after comprehensively weighting costs and benefits. The second view is motivation-based and relates expense stickiness to managerial incentives, suggesting that managers are not expected to behave as if they were in an ideal world. Among their dysfunctional behavior, perks and earnings management reflecting different contracting stimulations are often observed [ 28 ].

Planning and control are of the important tasks of management. Cost related information that managers need them to perform these tasks may be received from classified information reflected in the financial statements. The required information in this regard cannot be easily extracted from the financial statements [ 29 ]. A business entity expenses can show different behaviors suitable to the level of activity. In traditional cost model it is often assumed that administration, general and selling costs varies according to activity level. However, recent experimental studies have revealed evidence that shows that administration, general and selling costs behave asymmetrically [ 30 ]. An asymmetric behavior is a behavior in which cost increase more rapidly. In other words, the reduction in costs at the time of declining sales is lower than when the cost increases at the time of the same level of sales. This cost behavior is called cost stickiness. Expanding researches show that economic factors such as increase in assets and uncertainty about the future can have an impact on the asymmetric behavior of cost.

Costs stickiness

Cost behavior is defined as cost reaction in response to changes in activity level. Managers who understand how costs behave, have better circumstances for predicting spending trends in various operational positions. This position allows them to plan their activities and thus plan their operating revenues better. The traditional view related to costs indicates that changes in costs have a proper relationship with increased and decreased activity level. However, recent researches about costs behaviors indicate costs stickiness. Thus the degree of increase in costs level as a result of increase in activity level is higher than the degree of reduction in costs level as a result of decrease in activity level.

According to the idea of Anderson et al. [ 31 ], there are many reasons for costs stickiness. Some of these reasons include natural reluctance to lay off employees when downsizing, firm costs and the need for time to approve a reduction in the volume of activity and management decisions for maintaining used resources which could be the result of individual consideration and leads to imposing cost to the firm. By determining the stickiness of cost, the company owners can analyze whether managers incur costs to the firm or not [ 32 ].

Managers of manufacturing companies must consider the relationship of costs with income and the effect of income changes on the costs rate when planning and budgeting the company activities for predicting the future costs and thus offer a more comprehensive budget [ 33 ]. The ultimate goal of any business unit is maximizing profits and consequently, an increase in equity. Management of each profit-oriented enterprise tries to gain maximum benefit and efficiency from using the fewest resources and one of the simplest ways to reduce consumption of resources is cost control. But this requires complete knowledge of how costs behave and the factors influencing the behavior of the cost. One of the items that should be considered in the analysis of cost behavior is the phenomenon of cost stickiness. The public and dominant view is that with declining sales, costs should also be changed accordingly. But in fact, it does not happen [ 34 ].

Today, increasing competition in domestic and international markets has forced managers to better understand their cost structure and become aware of cost orientations means how the costs change. The meaning of cost orientation is a model according which costs react to changes in activity level [ 35 ]. Therefore, it is suggested that managers calculate their costs stickiness and consider all aspects of this important issue in their decisions. Orientation or the concept of cost stickiness gives a great help to investors and shareholders. Because in companies with strong stickiness, by reduced selling, costs will change more than the time when selling increases and this will be considered as a weakness of management by the investors and shareholders; while one of the main reasons of cost stickiness is bearing the current costs to avoid more losses in the future and or more profit in the future and it depends on management decisions [ 36 ].

Review of literature

Sustainable development refers to an economic, environmental and social development that meets the needs of the present and does not prevent future generations from fulfilling their needs. In manufacturing companies, collaboration between supply chain members is important for the sustainability and competitive advantage of a supply chain. The collaborative activities in a supply chain include various joint activities for cost reduction, research and development (R&D), product development, manufacturing, marketing, distribution, and service. The commitment of companies to corporate sustainability has been frequently discussed in theory and practice. Such a commitment to corporate sustainability demands a strategic approach to ensure that corporate sustainability is an integrated part of the business strategy and processes. Also, the effective adoption of continuously developing new technologies is a critical determinant of organizational competitiveness [ 37 – 41 ].

For the first time [ 5 ] tested the hypothesis that costs are sticky and approved the presence of stickiness in the costs behavior. They established a model with administration, general and sales costs as a function of sales, and found that costs increase by an average of 55% in response to a 1% increase in net income, but decrease only by 35% against 1% reduced income. In other words, a 1% increase in net sales, costs increase by 55% but by 1% decrease in net sales, costs decrease only by 35%. Due to the lack of public information about costs related drivers, they used data of administration, general and sales costs and net income of sales for the analysis of cost stickiness, and stated that they can analyze the behavior of administration, general and sales costs based on sales net income because sales volume stimulates many parts of this cost. Subramaniam and Weidenmier Watson [ 25 ] tested the presence of behavior of stickiness in the cost price of goods sold, and the results showed a positive relationship. They also tested the effect of different economic conditions, such as rates of GDP and the different characteristics of companies, such as total assets and number of employees of companies on costs stickiness. Their results showed that in periods of economic growth, the severity of stickiness is more and in the periods that income decrease happened in its previous periods, severity of stickiness decreases. Also, by increasing the ratio of total assets to sales and an increase in the number of personnel of companies, severity of cost stickiness increases. Stickiness of sales and distribution and general and administration costs has been studied in another study by Anderson et al. [ 31 ]. The main hypothesis of this study is public sale and administration costs. After collecting data related to cost of general sales and administration and sales revenue costs of 7629 American companies in a 20-year period (1979–1998), the relationship between costs and sales was examined by multi-varibale regression relationship. The results of this study did not confirm the main hypothesis of the research and announce the general sale and administration costs of companies in the statistical population of the research, sticky.

The results obtained by Weiss [ 18 ] from a sample of 2520 out of 44,931 industrial companies from 1986 to 2005 show the issue that the sticky behavior of costs increased the accuracy of analysts in predicting revenue in total, considering the fact that prediction horizon and especial effects of industry have put this analysis under control. With regard to the classification of costs into sticky and non-sticky costs, the results of Weiss's research [ 18 ] show that the accuracy of analysts in forecasting revenues for firms with sticky cost behavior is on average 25 percent less than that of people who analyze for companies with non-sticky cost behavior. Obviously, the behavior of cost has a considerable influence on the accuracy of analysts' prediction.

In Kordestani and Mortazavi, research [ 30 ], the power of profit prediction was compared with other models by the model based on variability and stickiness of cost. The study showed that the accuracy of prediction of the model based on the variability of costs and stickiness of cost is significantly higher than the other models. In several domestic researches, stickiness of various costs has been studied. According to the results of Ghaemi and Nematollahi's research, the cost price of the sold goods and selling and distribution and general and administration costs are sticky. Another study from the same researcher showed that overhead costs are sticky, but the costs of raw materials, direct wages and financial costs are not sticky.

In other study, Khani and Shafiei [ 42 ] examined cost stickiness and its relationship with sales and the results of their research indicate an undeniable relationship between the amount of sales and company earnings with the level of company's costs. Although their findings indicate that costs do not increase in proportion to profit increase, but there is a significant relationship between them.

In other study, Banker et al. [ 43 ] examined the relationship between uncertainty and sticky behavior of cost. By examining administration, general and sales costs, number of employees and their working hours, they evaluated cost stickiness. The results indicate the presence of cost stickiness in the sample under investigation. Sepasi et al. [ 44 ] examined the characteristics of management behavior toward costs stickiness. Their studied a sample consisting 14,568 year-company and examined administration, general and sales costs for the years 1992–2011. The results showed behavioral changes in managers about cost stickiness so that the occurrence of cost stickiness phenomenon increases the confidence of managers.

Management of strategy and strategic cost management

Effective strategic management, plays an important role in the success of the company or organization. Increase in competition in the international arena, new technologies and changes in business processes, caused management to become more dynamic and important than before. Managers should always have a competitive attitude and for this purpose the company's competitive strategy is essential. Strategic attitude leads the manager to anticipate changes and products and their production process will be designed based on anticipated changes in demand and customer's needs. In this situation, flexibility is important.

In developed countries, most organizations use data of cost management. But the extent of their reliance on this information depends on the nature of the competitive strategy of the company. Many companies compete on the basis of the provision of goods and services at the lowest cost price. Some companies compete on the basis of being a leader in production and offering superior and differentiated products. The role of cost management is supporting corporate strategy by providing the information through which one can be successful in products development and their marketing. For achieving corporate sustainability, we suggest to use the instruments of strategic cost management in manufacturing companies . Today, managers use strategic cost management tools to accomplish strategies and achieve main success producer factors.

Instruments of strategic cost management are as below:

The most common system that used in many companies is activity-based costing system. Activity-based costing system which is specifies the resources consumed by each activity during the relevant period; and thus the cost of each activity is precisely calculated. Then the aggregated costs of any activity are assigned to the considered product or customer, depending on the product consumption or the customer use of that activity [ 45 ]. The other instrument is bench-marking. Bench-marking is a process that the companies try to choose the best practice as of the right activity in comparison with the leading companies, then given the success-builder factors, the company processes are improved to the level of performance of its competitors or even reach to a better level. For identification of internal and external failure factors in the companies, we suggest to use total quality management technique. Total quality management a new concept that emphasizes on precise measurement of the costs and identification of internal and external failure factors, through which a way to lower production (lean production) by continuous improvement in company processes is created [ 46 ].

For finding the precise systems of measurement of the cost, in-time production system and kaizen costing are useful tools for manufacturing companies. In-time production system is a system based on the volume of demand. In this system, a piece of product will be purchased or produced only when a sign of its consumer is received. This prevents the accumulation of inventory in workstations. Among the main objectives of this system we can mention improvement of quality and increase in productivity with an emphasis on the kaizen concept. Kaizen costing is a managerial technique through which managers and employees of the company become committed to perform continuous improvement program in the quality and other key factors of success. In the path of continuous improvement, the processes are re-engineered and non-value activities in the manufacturing process are removed or left behind [ 47 ].

The other instruments are target costing and value engineering. In target costing method, the costs are determined according to the product price. It means that first the companies determine the product selling prices, by analyzes of the market and then according to their expected profit, determine the cost price of the product. In other words, goal-oriented costing system is profit planning and cost management system that in that base it was the price, and the essential emphasis is on customers. Goal-oriented costing system focuses on the design stage and requires the participation of all specialized units [ 48 ]. Value engineering is suggested with the aim of examination of all activities of a project, from the formation of the first thought to the design and implementation and then setting up and utilization, is known as one of the most efficient and the most important economic methods in the field of engineering activities [ 49 ]. The purpose of value engineering is eliminating or modifying any factor that leads to the imposition of unnecessary costs, without hurting the core and essential functions of the system. Value engineering is the continuous improvement of design and implementation and it is not merely a program to reduce costs, but is a way to maximize the value of designs [ 50 ].

Implementation stages of strategic cost management

Implementation stages of strategic cost management include value chain analysis, strategic situation analysis and analysis of structural and administrative costs drivers.

Analysis of the value chain

Value chain analysis is an instrument for strategic analysis that helps companies to better understand the competitive advantage. Value chain analysis focuses on the whole value chain of the product from design to production and after-sales service. The basic concept of analysis is that by a thorough examination of each of the activities in the value chain, one can reveal the activities that the companies have the highest or lowest success in them from competition perspective, and plan accordingly.

Analysis of strategic situation

At this stage, the company determines its potential and current competitive advantage by examining valued activities and cost drivers which have been specified in the previous stage. Companies which have competitive strategy of cost leadership are strongly trying to reduce their costs to the level of cost of cost leadership. Cost leadership focuses on cost reduction only as far as it makes sure that it is the leader in price and the holder of the lowest cost in the market. Reduction of costs is usually done by increasing productivity in the production process, distribution or general and administrative expenses. In this management strategy, maintaining stability is a priority and the company is not looking for innovation and risk-taking, but is looking for offering products and services at competitive prices. In contrast, competitive strategy of differentiation, allows the companies to raise the price of products higher than that of their competitors and without significant reduction in costs, have high profitability. These companies, by creating differentiation between the products and creating new features, make customers willing to pay a reasonable price as a result of this differentiation. Using the product differentiation strategy, one can reduce the intensity of competition and no threat of product substitution happens for the manufacturer, because all customers become loyal to the brand of the product [ 51 , 52 , 53 ].

Analysis of drivers of structural and executory cost

Strategic Analysis of cost drivers helps companies in improvement of their competitive situation. Drivers of structural and executory cost are used to facilitate operational and strategic decision-making.

Driver of structural cost, has strategic nature because it includes programs and decisions which have long-term effects. In this regard, the following items are necessary to be noted:

Scale: For example, a retail company shall determine the number of new stores it opens during the year in order to achieve the strategic goals and competitive success.

Technology: New technologies can significantly reduce the company costs. For example, some manufacturing companies in developed countries use computer technology to show number of products that their customers use (especially large retailers), so that whenever the customers run out of the inventory in the warehouse, they send for them quickly.

Complexity of products: companies that produce a high variety of products, have high cost of planning and management of production and also high distribution costs and after-sales service. Such companies usually use activity-based costing to determine the degree of profitability of their products.

Administrative cost drivers, are the factors that companies can manage them in the short term through operational decisions to reduce costs. These factors include:

Work commitment: work commitment causes reduction in costs. The companies in which there is a strong correlation between the employees, can significantly reduce their operating costs.

Design of Production process: the sequence arrangement of equipment and the frequency of processes lead to accelerating the production process in the company. Production technology innovations can significantly reduce costs.

Relationships with suppliers of raw materials of the company: the companies can reduce their costs significantly through agreements with suppliers of raw materials on quality, delivery time and other characteristics of their required raw materials.

Conclusions

Today, sustainability emphasizes various aspects of the organization in economic, social and environmental terms, so the importance of this issue is very important for current and future generations. Most companies have come to the conclusion that in order to improve the efficiency and effectiveness of production sustainability, they need to monitor, measure and control the characteristics of sustainable production. Therefore, measuring the sustainability of production has become an important issue in production and operations.

The purpose of this paper is to design a model for achieving a sustainable development index in order to integrate the economic, social and environmental performance data of manufacturing industries. By understanding the limitations and shortages of resources, the approach of the manufacturing companies includes the acquisition of new production mechanisms and technologies. To achieve newer and more innovative technologies tailored to their production processes in order to reduce production costs and increase their market share, these companies have conducted costly research. One way to deal with a shortage of resource for companies is reduce their costs. Companies regardless of sizes and operational scales must take economic opportunities into account in the long run, limiting opportunities, and incorporating innovative solutions, sustainable development, and positive social and environmental impact into their business activities.

Small-business owners face an ongoing challenge in trying to balance the need to serve customers and meet long-term business objectives while at the same time controlling the cost of doing business. A strategic cost management strategy in which cost decisions are made according to the value they add to both the business and the customer is often the most effective strategy a small business can adopt. Good financial decisions come from an effective cost management strategy designed to maximize value and minimize both initial and ongoing costs. Although a great many of a business’s cost-based decisions involve purchasing, pricing and inventory management, it’s also important for every small-business owner to consider costs involved inside the business.

In a competitive world, paying attention to cost management to reduce costs and increase customer satisfaction are priorities. Today, noting the proper role of the choosing quality and quantity of production factors, choosing between user processes or capital in the production process and selection of appropriate technology, in determining the cost price and producing products that meet the price reasonable in accordance with the customer' purchasing power appear more than before.

Providing the required information of cost management is possible only by establishing a modern system of management accounting including the design and use of various management accounting tools within the organization. Among these tools, there are activity-based costing, target costing, Kaizen costing, product life cycle costing. Strategic cost management is effective by accurate evaluation and identification of costs in the creation of income, profitability and value creation for companies.

By a correct understanding of their competitive situation and by using instruments of cost management, companies can reduce unnecessary costs. Also strategic cost management, by providing more accurate data for the managers, helps them in the short and long-term decision-making to achieve their strategic goals.

Given the importance of understanding the costs for those inside and outside the organization, such as managers, capital market analysts, investors and auditors recommendations for future research are presented as follows:

Examination of the effect of the changes in sales on costs stickiness.

Study of the relationship between management optimism with cost stickiness in various industries.

Examination of the relationship between the cost structure with behavior of each expense.

Availability of data and materials

This paper has no associated data.

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Hajer Jarrar

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Rounaghi, M.M., Jarrar, H. & Dana, LP. Implementation of strategic cost management in manufacturing companies: overcoming costs stickiness and increasing corporate sustainability. Futur Bus J 7 , 31 (2021). https://doi.org/10.1186/s43093-021-00079-4

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DOI : https://doi.org/10.1186/s43093-021-00079-4

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Research on cost accounting of enterprise carbon emission (in China)

• Hexiao Hu 1 , 
• Yalian Zhang 1 ,  ,  , 
• Chen Yao 1 , 
• Xin Guo 2 , 
• Zhijing Yang 1
• 1. Business College, Central South University of Forestry and Technology, Changsha 410004, China
• 2. School of Business and Enterprise, University of the West of Scotland, UK
• Received: 04 July 2022 Revised: 01 August 2022 Accepted: 04 August 2022 Published: 15 August 2022
• Full Text(HTML)
• Download PDF

Enterprises in China face two major challenges about their existence and energy supply at present. One is the difficulty in providing enough energy at an acceptable and reasonable price; the other is a severe environmental issue caused by over-consumption of energy. The government and relevant enterprises, therefore, mainly focus on carbon emission reduction, and the cost accounting of carbon emission, an essential prerequisite, and object of carbon emission reduction, should be further attention. The carbon emission cost is divided into internal cost and external cost, combined with the extended accounting model and cost calculation. This can comprehensively measure and reflect the two costs of the life cycle of the product, provide more relevant data and information support for the deepening and development of the circular economy, and provide an effective cost information basis and guide enterprise managers for scientific decision-making and governance.

• cost accounting of carbon emission ,
• carbon emission costs ,
• extended accounting model ,
• carbon emission ,

Citation: Hexiao Hu, Yalian Zhang, Chen Yao, Xin Guo, Zhijing Yang. Research on cost accounting of enterprise carbon emission (in China)[J]. Mathematical Biosciences and Engineering, 2022, 19(11): 11675-11692. doi: 10.3934/mbe.2022543

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• Figure 1. Product life cycle loop
• Figure 2. Cost gradual carry-over fractional step model
• Figure 3. Raw material and energy flow analysis method
• Figure 4. The corporate carbon flow cost accounting model
• Figure 5. Material (element) metabolism analysis model
• Figure 6. Corporate internal carbon cost accounting model based on carbon flow analysis

Newly released guidance concerning sponsored projects in iO.

CONTROLLER'S OFFICE

• Research & Cost Accounting

Research and Cost Accounting aspires to be a model organization in the field of post award sponsored projects administration, and to provide exceptional service to the Rice University community. We are charged with promoting an environment that facilitates the University's commitment to its research mission while effectively managing the sponsored projects under its stewardship in accordance with generally accepted accounting principles and according to the terms and conditions of the sponsoring agencies.

The primary responsibilities of the Post Award group include setting up awards and projects in the Oracle Finance (iO) system, preparing financial reports and invoices, closing out awards, and monitoring fiscal compliance. The Cost Accounting group's primary responsibilities include the preparation of sponsored project expenditure reports, coordinating audit reviews, managing the service center activities, management of the effort reporting process, and managing the F&A and fringe benefit proposal and negotiation process.

To accomplish our goals, we work collaboratively with the faculty and staff who direct and manage Rice's research projects and other sponsored programs.

Contact Research & Cost Accounting

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The Controller's Office is located in the Cambridge Office Building, also known as COB, at the intersection of S. Main street and Cambridge street.

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Research Cost: Meaning and Treatment | Overheads Accounting

In this article we will discuss about the meaning and treatment of research cost.

Meaning of Research Cost :

The research expenditure is the cost of searching for new products, new manufacturing process, improvement of existing products, processes or equipment. The development expenditure is the cost of putting research result on commercial basis.

Some of the costs relating to research and development are given below:

(a) Cost of raw materials used in research,

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(b) Salaries and wages of R & D staff,

(c) Subscriptions to books and journals,

(d) Subscriptions to research associations,

(e) Cost of tests conducted and trail runs,

(f) Depreciation, insurance, repairs and maintenance of buildings and research equipment, plant etc.,

(g) Patent fees,

(h) Upkeep and maintenance of R & D office, and 

(i) Travelling cost for surveys etc.

The research and development expenditure is a deferred charge which is in the nature of non­recurring expenditure which are expected to be of financial benefit to several accounting periods of indeterminate total length. It is the expenditure incurred for searching a new product or improved product or new methods of production and improved technologies.

The research costs are incurred for carrying basic research or applied research. But the development costs start with decision taken to produce new product or improved product and when the decision is taken to adopt new technologies and new production methods.

The objective in carrying basic research is to improve the existing scientific and/or technical knowledge. But the applied research is carried for a purpose directed towards a specific practical aim or objective.

Treatment of Research Cost :

The treatment of research costs is studied under two heads:

(1) Basic research costs.

(2) Applied research costs.

(a) Basic Research Costs:

These costs relate to all existing products, methods of operation, techniques of production and therefore, the basic research costs should be treated as production overhead for the period during which it has been incurred and has to be absorbed into product costs.

(b) Applied Research Costs:

The applied research costs classified into two for absorption purpose:

(i) If applied research costs relate to improvement of existing products and methods of production, it should be treated as manufacturing overhead for the period and has to be absorbed to the product cost.

(ii) In case, applied research costs are incurred for searching new products or methods of production etc., then such costs are amortised to the product that is newly invented or new method of production adopted. The whole of such expenditure should not be absorbed in the year in such expenditure has been incurred but a part of it should be carried over. The expenditure which, though of revenue nature, is spread over a number of years because its benefit is derived during those years.

When the applied research aimed at improvement of existing product or to invent a new product or development of new technology, and if the research work appears failure in getting the desired results, then such applied research expenditure is charged against profit in the Costing Profit and Loss Account of one or more years depending upon the size of expenditure incurred.

Related Articles:

• Overheads and Its Types [with Accounting Treatment]| Cost Accounting
• Treatment of Special Items of Overheads | Cost Accounting
• By-Products: Meaning and Accounting | Cost Accounting
• Treatment of Special Items of Overheads in Cost Accounts

• Accounting for Unallowable Costs

Section 1: Introduction

• Purpose of the Handbook
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Section 2: Proposal and Budget Development

• Charging Administrative Expenses
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• Program Income
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• Managing Subawards
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• Recharge Center Policy

Section 5 Closing an Award

• Financial Reporting
• Award Closeout
• Internal and External Audits
• Financial Record Retention

An unallowable cost is a cost that the sponsor prohibits and will not reimburse. Because NYU complies with all the terms and conditions of a sponsored award, at no time should unallowable costs be charged to an award. Proper tracking of unallowable costs is required for compliance with federal regulations.

NYU Approach

It’s important to keep in mind that activities and expenses that are unallowable on a federal award may still be allowable on a non-federal award.

Departments may still incur federally unallowable expenses, but they must be coded as unallowable so they can be readily identified and excluded from the indirect cost rate calculation.

The following methods are used by NYU to identify, separately code, and monitor Unallowable Costs:

• NYU provides separate accounts within the University’s financial system (see Resource: Identifying Unallowable Costs under Cost Accounting Standards (CAS) 505, OMB Uniform Guidance .
• It is the responsibility of the Principal Investigators (PI’s) and their staffs to monitor award expenditures to ensure that unallowable costs are identified and separately coded.
• At award closing, Sponsored Programs Administration (SPA) Financial Analysts review expenses.
• There is an in-depth review of expenses when developing the F&A rate proposal.

Examples of Unallowable Costs include:

• Advertising for NYU
• Alcoholic beverages
• Alumni Activities
• Contingency provisions
• Costs overrun from other projects
• Donations & gifts
• Employee auto allowances
• Entertainment
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• Corporation Tax

Research and Development (R&D) Tax Relief: The merged scheme and enhanced R&D intensive support

How to claim the new merged scheme R&D expenditure credit (RDEC) and enhanced R&D intensive support for accounting periods beginning on or after 1 April 2024.

R&D tax relief supports companies that work on innovative projects which meet the tax tax definition of R&D . To qualify as R&D , a project must seek an advance in a field of science or technology.

You cannot claim if the advance sought is in:

• social sciences, including economics

The merged scheme R&D expenditure credit ( RDEC ) and enhanced R&D intensive support ( ERIS ) replace the old RDEC and small and medium-sized enterprise ( SME ) schemes for accounting periods beginning on or after 1 April 2024. The expenditure rules for both are the same, but the calculation is different.

To claim either relief, you need to show how your project meets the tax definition of R&D for tax purposes.

Merged scheme — R&D expenditure credit

The merged scheme Research and Development expenditure credit is a taxable expenditure credit and can be claimed by eligible trading companies within the charge to UK Corporation Tax. You can choose to claim under the merged scheme instead even if you are eligible for enhanced Research and Development intensive support, but you cannot claim under both schemes for the same expenditure.

The Research and Development expenditure credit is liable to corporation tax as it is deemed to be trading income.

The calculation and the payment steps of the merged scheme RDEC are broadly the same as the old RDEC scheme, however:

• a lower rate of notional tax restriction at step 2 of the payment steps is available to small profit-makers and loss-makers
• a more generous PAYE cap applies

Whether your company makes a profit or loss, some or all of the expenditure credit may be used to pay your company’s or other group companies’ Corporation Tax liabilities.

In some circumstances the expenditure credit can:

• be used to pay other tax liabilities your company is liable for
• lead to a payment of credit to your company

Research and Development expenditure credit — rates

For expenditure under the merged scheme, the rate of Research and Development expenditure credit is 20%. This is the same as the rate under the old RDEC scheme for expenditure incurred on or after 1 April 2023.

For loss-makers and small profit-makers — that is, for companies with total profits chargeable to Corporation Tax of less than £50,000, excluding the RDEC claimed — a lower rate of notional tax restriction (currently 19%) applies at payment step 2.

For all other companies, the restriction will continue to apply at the Corporation Tax main rate (currently 25%).

Different rates apply to ring-fenced trades.

Enhanced R&D intensive support

Enhanced Research and Development intensive support allows loss-making R&D intensive SMEs to:

• deduct an extra 86% of their qualifying costs (additional deduction) in calculating their adjusted trading loss, as well as the 100% deduction which already appears in the accounts (or as a result of s1308 CTA 2009 Conditions to be satisfied — allowable as a deduction in computing the profit if that option is taken), to make a total of 186% deduction
• claim a payable tax credit, which is not liable to tax and which is worth up to 14.5% of the surrenderable loss

Companies registered in Northern Ireland should also refer to Research and Development ( R&D ) Tax Relief: Enhanced R&D intensive support for loss-making SMEs based in Northern Ireland .

To determine if you are a small and medium-sized enterprise, read guidance at CIRD91000 SME definition .

An SME is loss-making if it makes a loss for tax purposes before the additional deduction is taken. Unless you have such a loss, you will not be entitled to that deduction or any payable tax credit.

To claim under enhanced Research and Development intensive support, you have to meet the intensity condition. Generally, you will need to meet the condition for the period for which the claim is made. There is also a grace period, which means you can claim if you met the condition in your last 12-month accounting period and made a valid claim to SME relief or ERIS in that period on expenditure incurred on or after 1 April 2023.

Profit-making and non- R&D  intensive  SMEs  with qualifying R&D expenditure can claim relief under the merged scheme instead.

If you’re making your first enhanced Research and Development intensive support claim, you may be able to apply for advance assurance .

Intensity condition

A company meets the intensity condition, for an accounting period beginning on or after 1 April 2024, if its relevant R&D expenditure (plus that of any connected companies) is at least 30% of its total relevant expenditure (plus that of any connected companies). The periods you need to consider are:

• for the claimant company, the accounting period for which the claim is made
• for any worldwide connected companies, the period of time covered by the accounting period of the claimant company for which the claim is made — a company is connected if it was connected on any day during the accounting period

For further guidance on connection read CIRD82150 Categories of qualifying expenditure — connected persons .

You will need to identify the expenditure that relates to the periods under consideration. For accounting periods aligned with the accounting period of the claimant, you should use the exact figures for that accounting period.  

You should use a reasonable method to attribute expenditure of the connected company  to the period of time covered by the accounting period of the claimant company for which the claim is made where either:

• there is a mismatch of accounting periods between the claimant and one or more connected company
• a connected company is overseas (and so has no accounting period for UK tax purposes)

In certain circumstances it may be appropriate to apportion expenditure on a time (day) basis. But in other cases it will be necessary to have regard to when expenditure was incurred to give a fair result, for example, where R&D expenditure is incurred unevenly through a period. Any basis you adopt should be used consistently, and should fairly reflect the underlying economic reality.

Relevant R&D expenditure is expenditure on which R&D relief could be claimed for the period, whether or not a claim is actually made. Generally, it must also form part of the total relevant expenditure. Note that only trading companies chargeable to UK corporation tax (or companies eligible to claim relief for pre-trading expenditure under s1045 CTA 2009 SME scheme — pre-trading expenditure ) can have relevant R&D expenditure.

Total relevant expenditure includes:

• expenditure that is brought into account under Generally Accepted Accounting Practice ( GAAP ) in calculating the profits of a trade — if your accounts are prepared correctly under GAAP , this will be expenditure that feeds into the profit before tax in your profit and loss account or income statement
• if pre-trading, any pre-trading expenditure on which relief would be available under s1045 CTA 2009 SME scheme — pre-trading expenditure
• any amounts deducted in the tax computation under s1308 CTA 2009 Conditions to be satisfied — allowable as a deduction in computing the profit

It does not include:

• any amount of amortisation added back in the tax computation under s1308 CTA 2009 Conditions to be satisfied — allowable as a deduction in computing the profit
• any expenditure which consists of a payment, or other transfer of value, to another company with which the company is connected

Enhanced Research and Development intensive support — rates

The rate of the additional deduction is 86%.

The tax credit rate is 14.5%.

Check what expenditure qualifies 

Before you make a claim for enhanced Research and Development intensive support or for Research and Development expenditure credit under the merged scheme, check that:

• you have incurred expenditure as part of a project which seeks to make an advance in science or technology
• the project meets the tax definition of R&D for tax purposes
• the expenditure is of a type which qualifies for relief, as listed in the section ‘Which expenditure qualifies for relief’

Which expenditure qualifies for relief 

You can claim either R&D relief on some of the costs you incur from the start to the end of the R&D project. It applies equally to ERIS and to the new merged scheme Research and Development expenditure credit.

R&D starts when work begins to resolve the scientific or technological uncertainty and ends when that uncertainty is resolved, or the work to resolve it stops.

These sections will tell you which costs you can and cannot claim for.

Subsidised expenditure

Unlike in the relief for SMEs available before April 2024, there is no restriction on claiming for subsidised expenditure under the merged scheme or enhanced Research and Development intensive support.

Contracted out R&D and subcontractor costs

The approach to contracted out R&D for accounting periods beginning on or after 1 April 2024 is different from the approaches used in both the old Research and Development expenditure credit and SME schemes. It is the same for both the merged scheme and enhanced Research and Development intensive support.

The general rule is that the party who takes the decision to undertake R&D will be able to claim.

You can claim for the costs of contracting out your own R&D to another person, but you will need to be able to demonstrate that you intended or contemplated that R&D of that sort would be done. You can claim 65% of a payment made for R&D to an unconnected contractor. Connected contractor costs are subject to additional rules, but may be claimable up to 100% if all conditions are met.

Contracted out costs are subject to a restriction preventing them from qualifying where the activity takes place abroad, with some exceptions. 

HMRC has issued draft guidance on what is and is not contracted out R&D , and on overseas expenditure, and sought views on this. A final version of this guidance is currently being prepared and will be published shortly.

Transitional provision — if a contractor is still able to claim for the work they do for you under the old Research and Development expenditure credit scheme, you will not be able to claim.

You can also claim for work which meets the tax definition of R&D and which you have done to fulfil a contract, but normally only if this work does not constitute R&D contracted out to you — if your company took the initiative to do R&D . This means that the ultimate customer must not intend or contemplate that R&D of that sort would be done to fulfil the contract. If your customer is ineligible to claim, for example because it is a non-UK company, you may still be able to claim relief.

Transitional provision — if a customer is still able to claim for the work they are paying you to do for them under the old SME scheme, you will not be able to claim.

You can only claim for expenditure which you incur on paying overseas contractors to undertake work on your behalf in limited circumstances.

Transitional provision — where neither the customer or the supplier would otherwise be able to claim because one is under the new rules and the other is under the old rules, the legislation modifies the new rules to ensure that one party can claim.

Consumable items

You can claim for the relevant proportion of consumable items used up in the R&D , this includes:

You cannot claim the costs if you sell or transfer ownership of the consumable items used up in the R&D in the ordinary course of your trade.

Clinical trials volunteers

For R&D projects in the pharmaceutical industry, you can claim for payments made to the subjects of clinical trials.

Contributions for independent R&D

For accounting periods beginning on or after 1 April 2024, this category of expenditure no longer exists.

Data licence and cloud computing

For accounting periods beginning on or after 1 April 2023, qualifying expenditure is extended to include the relevant elements of data licence costs and cloud computing costs.

A data licence is a licence to access and use a collection of digital data.

Cloud computing includes:

• data storage
• hardware facilities
• operating systems
• software platforms

You can claim for most data and cloud computing costs spent on R&D . However, you cannot claim for data and cloud computing costs which are attributable to qualifying indirect activities.

Externally provided worker costs

Workers supplied by a staff provider such as an employment agency, are classed as externally provided workers.

• claim up to 100% of the relevant payments, if your company and the staff provider are connected
• claim 65% of the relevant payments made to a staff provider, which is not connected to your company, if they supply externally provided workers for the project

Externally provided worker costs in special circumstances are subject to a restriction preventing them from qualifying where the activity takes place abroad, with some exceptions. 

HMRC published draft guidance on overseas expenditure and sought views on this. A final version of this guidance is currently being prepared and will be published shortly.

Staffing costs

For staff working directly on the R&D project, you can claim for these costs, to the extent that they are attributable to the qualifying R&D :

• pension fund contributions
• secondary Class 1 National Insurance contributions paid by the company

In specific circumstances you may also claim for an element of administrative or support staff who work to directly support a project, for example:

• human resources used to recruit a specific person to work on the project
• specialist cleaning staff

These are known as qualifying indirect activities.

These are some examples of staff costs that you cannot claim for:

• redundancy payments
• staff costs for clerical or maintenance work that would have been done anyway, like managing payroll

You can claim for software licence fees for R&D and a reasonable proportion of the costs for software partly used in your R&D activities.

Examples of costs that do not qualify

These are other examples of costs that you cannot claim for:

• the production and distribution of goods and services
• capital expenditure
• the cost of land
• the costs of obtaining patents and trademarks
• rent, rates or leasing costs

How to calculate relief

Note that all expenditure is subject to a payment condition. Expenditure which has not been paid before the claim is made is not eligible for relief.

Work out the expenditure which is directly attributable to R&D, which includes both direct R&D and qualifying indirect activities.

Exclude any data and cloud computing costs attributable to qualifying indirect activities.

Exclude any contract or EPW payments attributable to R&D taking place abroad, unless an exemption applies.

Reduce any relevant unconnected subcontractor or external staff provider payments to 65% of the original cost — restrict any payments to connected contractors or staff providers, if the law requires it.

Add all costs together.

This is your qualifying expenditure.

Research and Development expenditure credit

Multiply your qualifying expenditure by the credit rate (20%) to get the expenditure credit amount.

Enhanced support for loss-making R&D intensive SMEs

Multiply your qualifying expenditure by 86% to give the additional deduction amount.

Multiply your total qualifying expenditure by 186% to give the enhanced expenditure amount.

You can surrender either the enhanced expenditure amount or your total unrelieved loss after taking the additional R&D relief deduction for the period, whichever is lower, for a payable tax credit at a rate of 14.5%. However, unless you are exempt from the cap, the tax credit you claim cannot exceed the PAYE cap.

The amount of the PAYE cap for claims under both the merged scheme and ERIS is £20,000 plus 300% of the company’s relevant PAYE and National Insurance contributions liabilities.

Under the merged scheme, the PAYE cap (where applying) limits the amount of payable credit you can receive in the accounting period for which you claim. Any excess over the cap is carried forward and treated as an amount of Research and Development expenditure credit to which the company is entitled for the next accounting period.

Under enhanced Research and Development intensive support, any claim for tax credit in excess of the cap (where applying) is invalid.

The PAYE cap does not apply if the company is exempt. Further information is available at CIRD90600 SME scheme — payable tax credit — restriction of the credit including PAYE cap .

Before you claim

You must follow these steps before you claim the expenditure credit, or your claim may not be valid.

For accounting periods beginning on or after 1 April 2023, check if you need to submit a claim notification form to notify HMRC in advance of your claim. Find out what you need to provide when you tell HMRC that you’re planning to claim R&D tax relief .

From 8 August 2023 you must submit an additional information form to support your claims. Find out how to send the information and what to provide when you submit detailed information before you claim R&D tax relief .

How to claim

Claim using the Company Tax Return and:

• for Research and Development expenditure credit, show the expenditure credit as taxable income in your profit and loss account, or by adding it to your profit in the single iXBRL computations file
• for ERIS , include the additional deduction in calculating your adjusted trading loss in your tax computations, and ensure that the losses which you have surrendered in order to receive a payable tax credit are excluded from your loss carry forward figure
• put an ‘X’ in box 656 to tell us that you’ve submitted the claim notification form
• put an ‘X’ in box 657 to tell us that you’ve submitted the additional information form
• include your bank details so that HMRC can make the payment

Complete the supplementary form CT600L .

Guidance is available to help you complete your Company Tax Return.

If your tax relief claim covers more than 12 months, submit a separate claim and additional information form for each accounting period.

You can make a claim any time up to the last day of the period either:

• 2 years beginning with the last day of the period of account, in a case where the period of account to which the claim relates is not longer than 18 months
• 42 months beginning with the first day of the period of account, in any other case

Check the ‘Before you claim’ section to make sure that your tax relief claim will be valid.

How to use the merged scheme Research and Development expenditure credit

You must follow these steps to use the expenditure credit before the final amount is paid to your company.

Use the credit to pay your Corporation Tax liability for the accounting period. If the credit means you’re due a repayment for Corporation Tax that has already been paid, the interest will be calculated from the day that the Research and Development expenditure credit is used to pay the liability.

If there is any expenditure credit left after paying some or all of your Corporation Tax liability go to step 2.

If there is no expenditure credit left, you do not need to follow step 2 to step 7.

Compare the amount of expenditure credit brought forward from step 1 with the net amount of expenditure credit you’ve claimed. The lower of the 2 figures is carried down to step 3.

If the expenditure credit brought forward exceeds the net amount, the excess may be either surrendered to another group company to meet a Corporation Tax liability which it owes to HMRC, or carried forward to pay the company’s Corporation Tax liability in future periods. 

The net amount of expenditure credit is the figure you’ve claimed minus notional tax on this amount at the applicable rate. This is the main rate of Corporation Tax (25%) for companies with total profits chargeable to Corporation Tax of more than £50,000, excluding the RDEC . Otherwise, it is the small profits rate (19%). 

Any amount exceeding the PAYE cap is carried forward to future periods unless the company is exempt from the cap. 

You must use the remaining amount to pay any outstanding Corporation Tax liabilities for any accounting periods.

You can surrender the credit which still remains at this step wholly or partly to any group member. The amount surrendered can only be used to pay a Corporation Tax liability of that group member.

You must use the expenditure credit to pay any other company tax liabilities, like VAT , PAYE or liabilities under a contract settlement.

Any RDEC left at this stage can, as long as the ‘going concern’ conditions are met, be paid to your company. Further information is available at CIRD89820 Payment restrictions — going concern requirement .

Made it clear that all expenditure is subject to a payment condition, instead of some.

First published.

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