Page 77 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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There can be other categories of costs, depending on the
nature of the company’s business. For example, a drug compa-
ny might carry separate categories for research and for product
development, because these are such significant cost areas for
a company in that business. A distribution company that buys
and sells products made by others would have no reason to
have research or development costs, but it might have a large
category called Distribution Expenses, because that’s a signifi-
cant area of expense for a distribution company.
Let’s look briefly at what each of these categories of expens-
es typically includes.
Research and Development: Finding Something New!
Research and development (R&D) is money spent to create
new products or to significantly improve existing products. The
classic example is the drug company that spends millions in the
laboratories exploring diseases for which there’s no cure known,
in the hopes of making an exciting discovery that will pay off
for all its research spending. It doesn’t always work out that
way, of course, and most R&D expenditures are ultimately
unproductive in terms of developing a product that can be sold.
Still, a company that depends on a flow of new products to sur-
vive in the marketplace must allocate a portion of its spending
each year to research if it is to stay in business.
Closely related are groupings of expenses often called engi-
neering expenses. Some companies prefer this caption, perhaps
because they do not think of themselves as engaged in basic
research, but rather in using engineering methodology to
improve on what’s already known about their business.
Further down the line from basic research and engineering
is an area called product development. This is the cost to take
the fruits of that research and produce new products that can be
sold, e.g., a cure for the common cold in simple pill form. It can
also be intended to improve existing products, such as a better
nasal spray or even a better dispenser for the same nasal spray.