Budgeting Basics and Beyond

11.4. R&D Budget

The R&D budget is based on an annual amount that the manager has decided to commit to develop new and improved products. The amount depends on the anticipated benefits based on previous efforts and success, desired growth rate, size of the division, risk and uncertainties, diversification, competition, market share, consumer tastes, financial resources, physical facilities, availability of raw materials, productivity, safety, reliability, price profitability, efficiency, productivity, employee number and capability, time constraints, product life cycle, stability of research program, obsolescence, and technological aspects.

A budget provision is needed so engineering keeps current products from becoming out-of-date.

The R&D budget may be based on:

• Estimated cost of specific projects

• A percentage of expected sales

• A percentage of current year and/or prior year sales

• A percentage of profit

• A percentage of operating income

• A percentage of investment in capital assets

• A percentage of cash flow

• R&D per unit

• R&D cost per hour equal to total R&D project costs divided by chargeable hours

• Product life cycle

The R&D budget should take into account the expected return on sales, return on investment (ROI), payback period, discounted payback period, net present value, and internal rate of return. A comparison should be made between the estimated ROI of a research project and its actual ROI. Variances should be computed and analyzed, with corrective action taken when warranted.

R&D ...