Budgeting Basics and Beyond

Chapter 11. Research and Development: Budgets for a Long-term Plan

Research and development (R&D) is needed to develop new products and services or to significantly improve existing ones in order to remain competitive and grow. R&D includes:

• Conceptual formulation and design, as well as testing, in search for or evaluation of possible product or process alternatives

• Modification of the formulation or design of a product or process

• Design, construction, and testing of preproduction prototypes and models

• Design of tools and dies involving new technology

There should be planning and control over such R&D areas as how much to spend, what to spend it on, and how to ensure that the funds are being spent properly. R&D should be accumulated by type of expenditure, by division, by department, and by responsibility center within a department. The budget for technical departments is the sum of the total budget for all R & D activities and supporting engineering services. The nonfinancial manager must constantly appraise R &D progress, success rate, problems, risks, staff, and facilities. R&D should primarily be based on long -run goals, competition, judgment, and financial capabilities.

R&D should be consistent with the goals of the division or department. Therefore, R&D should be higher for high -technology divisions. A division with older technology typically spends less on R &D and more on engineering to sustain current products and processes.

Preferably, R&D should be directed toward the ...