Research and Development Expenses
Industry:
Market-Wide
Efficiency
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Short Definition
Research & Development (R&D) Expense is the all-in cost to build and improve the product: product/engineering/design payroll, contractors, dev/test environments, tools, prototypes/labs/clinical studies, patent work, and amortization of capitalized development (per policy). It excludes costs to market, sell, or deliver the product.
Short Definition
Research & Development (R&D) Expense is the all-in cost to build and improve the product: product/engineering/design payroll, contractors, dev/test environments, tools, prototypes/labs/clinical studies, patent work, and amortization of capitalized development (per policy). It excludes costs to market, sell, or deliver the product.
Short Definition
Research & Development (R&D) Expense is the all-in cost to build and improve the product: product/engineering/design payroll, contractors, dev/test environments, tools, prototypes/labs/clinical studies, patent work, and amortization of capitalized development (per policy). It excludes costs to market, sell, or deliver the product.
Why it matters for Investors
Innovation intensity: Shows how much you invest to ship roadmap and moat.
Speed vs. spend: Trend vs velocity of shipping helps judge efficiency.
Path to margin: Clean R&D classification keeps gross/operating margins comparable.
Why it matters for Investors
Innovation intensity: Shows how much you invest to ship roadmap and moat.
Speed vs. spend: Trend vs velocity of shipping helps judge efficiency.
Path to margin: Clean R&D classification keeps gross/operating margins comparable.
Why it matters for Investors
Innovation intensity: Shows how much you invest to ship roadmap and moat.
Speed vs. spend: Trend vs velocity of shipping helps judge efficiency.
Path to margin: Clean R&D classification keeps gross/operating margins comparable.
Formula
Practical considerations -
Scope line: Build/ship the product → Research and Development Expense. Market/sell → Sales and Marketing Expense. Deliver/run production → Cost Of Goods Sold. Admin → General and Administrative Expense.
Capitalization: If you capitalize eligible dev costs, expense the amortization here (or per your policy). Disclose the policy and be consistent.
People vs delivery: Customer support/implementation tied to SLAs → Cost Of Goods Sold (not R&D).
Cloud costs: Dev/QA sandboxes → Research and Development Expense. Production hosting → Cost Of Goods Sold.
Hardware/biotech: Prototypes, lab consumables, trial costs, specialized equipment depreciation → Research and Development Expense.
Formula
Practical considerations -
Scope line: Build/ship the product → Research and Development Expense. Market/sell → Sales and Marketing Expense. Deliver/run production → Cost Of Goods Sold. Admin → General and Administrative Expense.
Capitalization: If you capitalize eligible dev costs, expense the amortization here (or per your policy). Disclose the policy and be consistent.
People vs delivery: Customer support/implementation tied to SLAs → Cost Of Goods Sold (not R&D).
Cloud costs: Dev/QA sandboxes → Research and Development Expense. Production hosting → Cost Of Goods Sold.
Hardware/biotech: Prototypes, lab consumables, trial costs, specialized equipment depreciation → Research and Development Expense.
Formula
Practical considerations -
Scope line: Build/ship the product → Research and Development Expense. Market/sell → Sales and Marketing Expense. Deliver/run production → Cost Of Goods Sold. Admin → General and Administrative Expense.
Capitalization: If you capitalize eligible dev costs, expense the amortization here (or per your policy). Disclose the policy and be consistent.
People vs delivery: Customer support/implementation tied to SLAs → Cost Of Goods Sold (not R&D).
Cloud costs: Dev/QA sandboxes → Research and Development Expense. Production hosting → Cost Of Goods Sold.
Hardware/biotech: Prototypes, lab consumables, trial costs, specialized equipment depreciation → Research and Development Expense.
Worked Example
Line Item | Amount | Notes |
|---|---|---|
Add : People (Prod/Eng/Design) Expense | $900,000 | Salaries, benefits, payroll taxes, stock comp |
Add : Contractors & advisors Expense | $140,000 | Outsourced engineering & design |
Add : Dev/ QA environments (cloud/test) Expense | $60,000 | Non-production environments |
Add : Tools & Licenses Expense | $30,000 | Repo, CI/CD, design, testing tools |
Add : Prototypes/ labs/ trials Expense | $40,000 | Hardware samples, lab supplies, user studies |
Add : Patents & Technical legal Expense | $20,000 | Filing, prior-art searches |
Add : Amortized of Capitalized Development Expense | $20,000 | Amortization this period under accounting rules (eg. under ASC 606) |
Total R&D Expense | $1,210,000 | Sum of above |
Notes:
Capitalized this quarter (off P&L): $200,000 of eligible dev costs (policy-based).
Production hosting excluded: sits in COGS per policy.
Worked Example
Line Item | Amount | Notes |
|---|---|---|
Add : People (Prod/Eng/Design) Expense | $900,000 | Salaries, benefits, payroll taxes, stock comp |
Add : Contractors & advisors Expense | $140,000 | Outsourced engineering & design |
Add : Dev/ QA environments (cloud/test) Expense | $60,000 | Non-production environments |
Add : Tools & Licenses Expense | $30,000 | Repo, CI/CD, design, testing tools |
Add : Prototypes/ labs/ trials Expense | $40,000 | Hardware samples, lab supplies, user studies |
Add : Patents & Technical legal Expense | $20,000 | Filing, prior-art searches |
Add : Amortized of Capitalized Development Expense | $20,000 | Amortization this period under accounting rules (eg. under ASC 606) |
Total R&D Expense | $1,210,000 | Sum of above |
Notes:
Capitalized this quarter (off P&L): $200,000 of eligible dev costs (policy-based).
Production hosting excluded: sits in COGS per policy.
Worked Example
Line Item | Amount | Notes |
|---|---|---|
Add : People (Prod/Eng/Design) Expense | $900,000 | Salaries, benefits, payroll taxes, stock comp |
Add : Contractors & advisors Expense | $140,000 | Outsourced engineering & design |
Add : Dev/ QA environments (cloud/test) Expense | $60,000 | Non-production environments |
Add : Tools & Licenses Expense | $30,000 | Repo, CI/CD, design, testing tools |
Add : Prototypes/ labs/ trials Expense | $40,000 | Hardware samples, lab supplies, user studies |
Add : Patents & Technical legal Expense | $20,000 | Filing, prior-art searches |
Add : Amortized of Capitalized Development Expense | $20,000 | Amortization this period under accounting rules (eg. under ASC 606) |
Total R&D Expense | $1,210,000 | Sum of above |
Notes:
Capitalized this quarter (off P&L): $200,000 of eligible dev costs (policy-based).
Production hosting excluded: sits in COGS per policy.
Best Practices
Publish the boundary: What’s R&D vs S&M vs COGS vs G&A. Don’t drift.
Tag projects: Use cost centers/codes (feature, platform, debt) to see ROI.
Separate run vs build: Maintenance/bug-fix vs new roadmap—report both.
Disclose capitalization: What you capitalize, amortization period, and where amort flows.
Track intensity & leverage: R&D as % of revenue; R&D per engineer; output per $ (features shipped, cycle time).
Best Practices
Publish the boundary: What’s R&D vs S&M vs COGS vs G&A. Don’t drift.
Tag projects: Use cost centers/codes (feature, platform, debt) to see ROI.
Separate run vs build: Maintenance/bug-fix vs new roadmap—report both.
Disclose capitalization: What you capitalize, amortization period, and where amort flows.
Track intensity & leverage: R&D as % of revenue; R&D per engineer; output per $ (features shipped, cycle time).
Best Practices
Publish the boundary: What’s R&D vs S&M vs COGS vs G&A. Don’t drift.
Tag projects: Use cost centers/codes (feature, platform, debt) to see ROI.
Separate run vs build: Maintenance/bug-fix vs new roadmap—report both.
Disclose capitalization: What you capitalize, amortization period, and where amort flows.
Track intensity & leverage: R&D as % of revenue; R&D per engineer; output per $ (features shipped, cycle time).
FAQs
Does R&D include stock-based comp?
Yes—if paid to product/engineering/design, it sits in R&D expense.Do product managers and designers count as R&D?
Yes—when they work on building/improving the product.Is customer support R&D?
No. If it helps deliver the product (SLAs, onboarding), it’s usually COGS.Capitalized development—where does it go?
Capitalize eligible costs (policy/auditor). Then expense amortization each period (often in R&D). Be consistent and disclose.Where do production hosting costs go?
COGS (they deliver the service). Dev/QA environments stay in R&D.Hardware or biotech—what’s different?
Prototypes, lab supplies, trial/clinical costs, and related equipment depreciation are typically R&D until the product is production-ready.
FAQs
Does R&D include stock-based comp?
Yes—if paid to product/engineering/design, it sits in R&D expense.Do product managers and designers count as R&D?
Yes—when they work on building/improving the product.Is customer support R&D?
No. If it helps deliver the product (SLAs, onboarding), it’s usually COGS.Capitalized development—where does it go?
Capitalize eligible costs (policy/auditor). Then expense amortization each period (often in R&D). Be consistent and disclose.Where do production hosting costs go?
COGS (they deliver the service). Dev/QA environments stay in R&D.Hardware or biotech—what’s different?
Prototypes, lab supplies, trial/clinical costs, and related equipment depreciation are typically R&D until the product is production-ready.
FAQs
Does R&D include stock-based comp?
Yes—if paid to product/engineering/design, it sits in R&D expense.Do product managers and designers count as R&D?
Yes—when they work on building/improving the product.Is customer support R&D?
No. If it helps deliver the product (SLAs, onboarding), it’s usually COGS.Capitalized development—where does it go?
Capitalize eligible costs (policy/auditor). Then expense amortization each period (often in R&D). Be consistent and disclose.Where do production hosting costs go?
COGS (they deliver the service). Dev/QA environments stay in R&D.Hardware or biotech—what’s different?
Prototypes, lab supplies, trial/clinical costs, and related equipment depreciation are typically R&D until the product is production-ready.
Related Metrics
Parents: Operating Expense, Total Expense (Operating Expense + COGS)
Children / Components:
People (Product/Eng/Design) : Salaries, benefits, payroll taxes, stock comp for engineers, product managers, designers, QA.
Contractors & Advisors : Freelance engineering/design, security reviewers, specialist consultants building product.
Dev/QA Environments (non-production) : Cloud/test sandboxes, staging clusters, test databases, CI/CD runners. (Production hosting belongs in COGS.)
Software & Tools for Build/Test : Repos, CI/CD, issue tracking, feature flags, testing frameworks, design tools, device/browser farms.
Prototypes & Materials (hardware/IoT) : BOM for prototype units, 3D printing, PCB runs, fixtures, lab consumables.
Labs & Trials (hardware/biotech/medtech) : Bench time, reagents, clinical/user trials, certifications, regulatory testing.
Data for Product Development (AI/ML & analytics) : Training/inference dev compute, labeling, synthetic data generation, model evaluation tools.
(Production inference serving → COGS.)Patents & Technical Legal : Prior-art searches, filings, office actions, maintenance fees tied to core tech.
Amortization of Capitalized Development : Period amortization of eligible dev costs previously capitalized (policy/auditor driven).
Depreciation of R&D Equipment : Test rigs, dev devices, lab instruments used for building/testing the product.
Research Services : External research labs, university collaborations, paid studies tied to product R&D.
Training & Enablement (R&D teams) : Technical certifications, conferences for engineers/product (not sales events).
Security, Quality & Compliance for Build : Code scanning, pentests for pre-prod, QA certifications during development.
Other Direct R&D : Bug bounties (pre-prod), usability studies for product improvement.
Commonly mistaken for:
COGS / Cost of Sales : Production hosting/CDN, payment processing, live customer support/implementation to meet SLAs, manufacturing labor for shipped units.
Sales & Marketing (S&M) Expense : Marketing site builds, ad/brand spend, sales demo content, partner MDF, growth experiments aimed at demand gen.
G&A Expense : Corporate IT helpdesk, email/HR/finance tools, facilities/office rent, non-patent legal, accounting.
Capitalized Development (Intangible Asset) : Eligible build costs put on the balance sheet; only the amortization later hits P&L (often in R&D). Don’t expense and capitalize the same cost.
CapEx (PP&E) : Lab gear, test devices, benches recorded as capital expenditures; only depreciation shows in R&D expense over time.
Inventory / COGS for trial production : Pilot runs made for sale → inventory/COGS. R&D covers prototypes used for testing/validation.
Production data/APIs & inference compute : Usage tied to serving customers in production → COGS. Dev/staging/training for building the product → R&D.
Customer research for go-to-market : Pricing/positioning and campaign testing → S&M. Usability studies to improve the product → R&D.
Customer success / onboarding : If it fulfills contracted service → COGS. If it’s product beta/experimentation work → may be R&D (document policy).
Related Metrics
Parents: Operating Expense, Total Expense (Operating Expense + COGS)
Children / Components:
People (Product/Eng/Design) : Salaries, benefits, payroll taxes, stock comp for engineers, product managers, designers, QA.
Contractors & Advisors : Freelance engineering/design, security reviewers, specialist consultants building product.
Dev/QA Environments (non-production) : Cloud/test sandboxes, staging clusters, test databases, CI/CD runners. (Production hosting belongs in COGS.)
Software & Tools for Build/Test : Repos, CI/CD, issue tracking, feature flags, testing frameworks, design tools, device/browser farms.
Prototypes & Materials (hardware/IoT) : BOM for prototype units, 3D printing, PCB runs, fixtures, lab consumables.
Labs & Trials (hardware/biotech/medtech) : Bench time, reagents, clinical/user trials, certifications, regulatory testing.
Data for Product Development (AI/ML & analytics) : Training/inference dev compute, labeling, synthetic data generation, model evaluation tools.
(Production inference serving → COGS.)Patents & Technical Legal : Prior-art searches, filings, office actions, maintenance fees tied to core tech.
Amortization of Capitalized Development : Period amortization of eligible dev costs previously capitalized (policy/auditor driven).
Depreciation of R&D Equipment : Test rigs, dev devices, lab instruments used for building/testing the product.
Research Services : External research labs, university collaborations, paid studies tied to product R&D.
Training & Enablement (R&D teams) : Technical certifications, conferences for engineers/product (not sales events).
Security, Quality & Compliance for Build : Code scanning, pentests for pre-prod, QA certifications during development.
Other Direct R&D : Bug bounties (pre-prod), usability studies for product improvement.
Commonly mistaken for:
COGS / Cost of Sales : Production hosting/CDN, payment processing, live customer support/implementation to meet SLAs, manufacturing labor for shipped units.
Sales & Marketing (S&M) Expense : Marketing site builds, ad/brand spend, sales demo content, partner MDF, growth experiments aimed at demand gen.
G&A Expense : Corporate IT helpdesk, email/HR/finance tools, facilities/office rent, non-patent legal, accounting.
Capitalized Development (Intangible Asset) : Eligible build costs put on the balance sheet; only the amortization later hits P&L (often in R&D). Don’t expense and capitalize the same cost.
CapEx (PP&E) : Lab gear, test devices, benches recorded as capital expenditures; only depreciation shows in R&D expense over time.
Inventory / COGS for trial production : Pilot runs made for sale → inventory/COGS. R&D covers prototypes used for testing/validation.
Production data/APIs & inference compute : Usage tied to serving customers in production → COGS. Dev/staging/training for building the product → R&D.
Customer research for go-to-market : Pricing/positioning and campaign testing → S&M. Usability studies to improve the product → R&D.
Customer success / onboarding : If it fulfills contracted service → COGS. If it’s product beta/experimentation work → may be R&D (document policy).
Related Metrics
Parents: Operating Expense, Total Expense (Operating Expense + COGS)
Children / Components:
People (Product/Eng/Design) : Salaries, benefits, payroll taxes, stock comp for engineers, product managers, designers, QA.
Contractors & Advisors : Freelance engineering/design, security reviewers, specialist consultants building product.
Dev/QA Environments (non-production) : Cloud/test sandboxes, staging clusters, test databases, CI/CD runners. (Production hosting belongs in COGS.)
Software & Tools for Build/Test : Repos, CI/CD, issue tracking, feature flags, testing frameworks, design tools, device/browser farms.
Prototypes & Materials (hardware/IoT) : BOM for prototype units, 3D printing, PCB runs, fixtures, lab consumables.
Labs & Trials (hardware/biotech/medtech) : Bench time, reagents, clinical/user trials, certifications, regulatory testing.
Data for Product Development (AI/ML & analytics) : Training/inference dev compute, labeling, synthetic data generation, model evaluation tools.
(Production inference serving → COGS.)Patents & Technical Legal : Prior-art searches, filings, office actions, maintenance fees tied to core tech.
Amortization of Capitalized Development : Period amortization of eligible dev costs previously capitalized (policy/auditor driven).
Depreciation of R&D Equipment : Test rigs, dev devices, lab instruments used for building/testing the product.
Research Services : External research labs, university collaborations, paid studies tied to product R&D.
Training & Enablement (R&D teams) : Technical certifications, conferences for engineers/product (not sales events).
Security, Quality & Compliance for Build : Code scanning, pentests for pre-prod, QA certifications during development.
Other Direct R&D : Bug bounties (pre-prod), usability studies for product improvement.
Commonly mistaken for:
COGS / Cost of Sales : Production hosting/CDN, payment processing, live customer support/implementation to meet SLAs, manufacturing labor for shipped units.
Sales & Marketing (S&M) Expense : Marketing site builds, ad/brand spend, sales demo content, partner MDF, growth experiments aimed at demand gen.
G&A Expense : Corporate IT helpdesk, email/HR/finance tools, facilities/office rent, non-patent legal, accounting.
Capitalized Development (Intangible Asset) : Eligible build costs put on the balance sheet; only the amortization later hits P&L (often in R&D). Don’t expense and capitalize the same cost.
CapEx (PP&E) : Lab gear, test devices, benches recorded as capital expenditures; only depreciation shows in R&D expense over time.
Inventory / COGS for trial production : Pilot runs made for sale → inventory/COGS. R&D covers prototypes used for testing/validation.
Production data/APIs & inference compute : Usage tied to serving customers in production → COGS. Dev/staging/training for building the product → R&D.
Customer research for go-to-market : Pricing/positioning and campaign testing → S&M. Usability studies to improve the product → R&D.
Customer success / onboarding : If it fulfills contracted service → COGS. If it’s product beta/experimentation work → may be R&D (document policy).
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