Allocation of Overhead Costs in R&D: A Practical Approach

In modern companies, research and development (R&D) play a crucial role in enhancing competitiveness. However, managing R&D expenses is a complex task, especially when it comes to overhead costs, which must be properly allocated across projects. Let’s explore the main methods of allocating overhead costs, their advantages and differences, and the practices used in the US and Europe.

What Are Overhead Costs and Why Are They Important?

Overhead costs include expenses that cannot be directly assigned to a specific project but are necessary for its execution. These may include:

• Administrative costs (management salaries, office expenses);
• Depreciation of equipment;
• Facility rental;
• Utility payments;
• Other indirect costs.

Proper allocation of these costs enables companies to more accurately assess the expenses for each project and make well-informed management decisions.

Key Methods of Allocating Overhead Costs

1. Proportional Method (Based on Direct Costs)

This method distributes overhead costs proportionally to the direct costs of each project (e.g., material and labor costs).

Advantages:

• Simple to apply;
• Suitable for homogeneous projects with similar cost structures.

Disadvantages:

• May distort cost distribution if projects vary in complexity and nature;
• Does not account for actual resource utilization.

2. Coefficient Method

This method uses specific coefficients that reflect the characteristics of each project (labor intensity, equipment usage, technological complexity, etc.).

Advantages:

• Accounts for project-specific features;
• Flexible in coefficient selection.

Disadvantages:

• Requires additional calculations;
• Can be subjective if coefficients are assigned without clear justification.

3. ABC Method (Activity-Based Costing)

This method analyzes specific activities that consume overhead resources. For example, if equipment is used in two projects, its depreciation is allocated based on usage time.

Advantages:

• Provides maximum accuracy;
• Allows detailed cost structure analysis.

Disadvantages:

• Complex to implement;
• Requires automated accounting systems.

4. Allocation Based on the Payroll Fund of Key Production (Scientific) Personnel

This method assumes that overhead costs are distributed in proportion to the payroll fund of employees directly involved in projects.

Advantages:

• Accurately reflects labor costs in R&D;
• Suitable for scientific and research organizations where human resources, rather than materials, are the primary asset.

Disadvantages:

• May lead to inflated overhead costs for labor-intensive projects, even if they do not require significant material resources.

International Practices in Overhead Cost Allocation

United States

In American companies, particularly in high-tech and defense sectors, the ABC method is widely used. This is due to a high level of accounting automation and the need for maximum accuracy. Large corporations such as Boeing and Lockheed Martin apply this method for precise cost tracking in complex projects.

Europe

In European countries, such as Germany and the UK, the ABC method is also widely used. However, in some industries, the coefficient method is preferred. For example, in the pharmaceutical industry, where projects can span decades, long-term changes must be considered rather than just current costs.

Conclusion

The choice of overhead cost allocation method depends on the specifics of the business, industry, and available resources.

• The proportional method is suitable for simple projects with similar cost structures.
• The coefficient method is better for accounting for project-specific details.
• The ABC method is optimal for detailed cost structure analysis and maximum accuracy.
• Payroll-based allocation is recommended in R&D, where labor intensity plays a key role.

Companies should carefully analyze their needs and capabilities to select the most effective method, ensuring accurate cost accounting and market competitiveness.