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Chapter 12: Problem 23

In \(2009,\) Austin Powers Corporation developed a new product that will be marketed in \(2010 .\) In connection with the development of this product, the following costs were incurred in 2009 : research and development costs \(\$ 400,000 ;\) materials and supplies consumed \(\$ 60,000 ;\) and compensation paid to research consultants \(\$ 125,000\). It is anticipated that these costs will be recovered in 2012 What is the amount of research and development costs that Austin Powers should record in 2009 as a charge to expense?

Short Answer

Expert verified
Austin Powers should record $585,000 as a charge to expense in 2009.

Step by step solution

01

Identify Relevant Costs

Research and development (R&D) costs include expenses incurred to develop a new product. Here, the costs mentioned are: research and development costs ($400,000), materials and supplies ($60,000), and compensation to research consultants ($125,000).
02

Sum All Costs

Add together all the R&D-related costs to find the total R&D expenses.\[400,000 + 60,000 + 125,000 = 585,000\]
03

Determine Accounting Treatment

Since these costs are associated with research and development, they should be recorded as an expense in the year incurred, regardless of when they might be recovered.
04

Record as Charge to Expense

The full amount of R&D costs calculated in Step 2 should be recorded as an expense in 2009. This means $585,000 will be charged to the expense account.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

R&D expenses
Research and Development (R&D) expenses are the costs associated with the activities undertaken to innovate and introduce new products or processes. These costs are crucial for companies aiming to maintain competitive advantage and to foster growth through innovation. R&D expenses can include:
  • Cost of materials and supplies used in the research process.
  • Salaries and wages for personnel involved in research activities.
  • Fees paid to external consultants and contractors for research work.
  • Overhead costs associated with the research facilities.
It's important to understand that these expenses are integral to the product development phase, and while they might be substantial, they play a significant role in the long-term profitability of a company. In the example given, Austin Powers Corporation incurred a total of $585,000 in R&D expenses for 2009.
Accounting Treatment
The accounting treatment of R&D expenses can often be a matter of financial strategy and regulatory compliance. Generally Accepted Accounting Principles (GAAP) mandate that R&D costs should be treated as an expense and not as an asset. This means that companies should:
  • Record all R&D expenses in the period they occur, even if the benefits of those expenses will be realized in future periods.
  • Use a "charge to expense" approach which impacts the company鈥檚 income statement by reducing the net income in the year the costs are incurred.
Schematically, recording R&D expenses affects financial statements in the year of expenditure, but offers a clear reflection of the real-time cost of innovation. For Austin Powers Corporation, the full amount of $585,000 was charged to expense in 2009, reflecting this accounting treatment.
R&D costs calculation
Calculating the total R&D costs involves summing all relevant expenses attributed to research and development activities. For any given period, you would:
  • Identify all costs directly and indirectly linked to R&D processes.
  • Total these costs to determine the R&D expenditure.
  • Ensure comprehensive inclusion of every expense that contributes to developing new products or processes, like materials, labor, and consultant fees.
In practical application, as demonstrated by Austin Powers Corporation, calculating the R&D costs required aggregation of various incurred expenses:\[400,000 + 60,000 + 125,000 = 585,000\]This calculation ensures an accurate representation of the financial input dedicated to innovation and development for that year.

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Most popular questions from this chapter

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