1962 Freeman: Current Status of Accounting in R and D 179

ticularly 1) those concerned with maximizing the prob- [4] R. Bellman, "Dynamic Programming," Princeton UniversityPress, Princeton, N. J.; 1957.ability of attaining a certain level of performance or [5] R. E. Wilson, "The attitude of management toward industrial2) maximizing gains. Under models of the latter type, research," in "Mechanical Engineering," vol. 72, pp. 8-11;2) maximizinggains. ~~~~~~~~January, 1950.it would not be inconsistent to have research allocations [6] F. Olsen, "Evaluating the results of research," in "Researchmade to projects with negative expected returns. Although in Industry: Its Organization and Management," C. C. Furnas,Ed., D. Van Nostrand Co., Inc., New York, N. Y.; 1948.these projects may have negative expectations, the [7] F. Olsen, "The control of research funds," Proc. 5th Annualprobability of a large gain would be sufficient to justify Conf. on Industrial Research: Coordination, Control and Financ-ing of Industrial Research, Columbia University Press, Newthe research. York, N. Y.; 1955.

[8] R. H. Manley, "Translating the economic aspects of companypolicy into research policy," Proc. 5th Annual Conf. on In-

ACKNOWLEDGMENT dustrial Research: Coordination, Control and Financing ofIndustrial Research, Columbia University Press, New York,The author wishes to express his appreciation to Prof. N. Y.; 1955.[91 "There's Safety in Numbers," Business Week; March 11, 1956.

B. V. Dean of Case Institute of Technology, whose [10] B. H. Rosen and A. L. Regnier, "Economics and researchassistance and supervision were invaluable in the prepara- programming," Chem. Engrg. Progress, vol. 52, pp. 500-502;

tion of thiswork. ~~~~~~~~December, 1956.letoofpjcstion of this work. [11] C. M. Mottley and R. D. Newton, "The selection of projectsfor industrial research," Operations Research. vol. 7, pp. 740-751; December, 1959.

REFERENCES [12] W. H. Wilson, "Determination and Control of the Researchand Development Budget," M.S. thesis, Case Institute of[1] B. V. Dean and S. Sengupta, "The Economic Effect of Re- Technology, Cleveland, Ohio; 1958.

search and Development Activities on the Company," (To be [13] S. Sobelman, "A Modern Dynamic Approach to Product De-published by the Office of Special Studies, National Science velopment," Picatinny Arsenal, Dover, N. J.; December, 1958.Foundation). [14] G. K. Johnson and I. M. Turner, "Use of transfer functions

[21 R. J. Freeman, "An Operational Analysis of Industrial Re- for company planning," Operations Research, vol. 4, pp. 705-search," Ph.D. dissertation, M.I.T., Cambridge, Mass.; June, 710; December, 1956.1957. [15] S. W. Hess, "On Research and Development Budgeting and

[3] T. L. Saaty, "Mathematical Methods of Operations Research," Project Selection," Ph.D. dissertation, Case Institute of Tech-McGraw-Hill Book Co., Inc., New York, N. Y.; 1959. nology, Cleveland, Ohio; 1960.

A Survey of the Current Status of Accountingin the Control of R and D*

J. R. FREEMANt

Summary-A survey was made of the role of the accountant in interviews were employed. The initial questionnaire wasthe control of Research and Development, primarily through a addressed to 202 industrial firms that were selected in amailed questionnaire and a limited number of interviews. Data from51 responding companies in a variety of industries include locus of manner to provide a cross section of various industriesresponsibility for R & D budget preparation, basis for the annual and a typical range of company sizes within these in-budget, frequency of revision of budget, and other factors. dustries. The list included, but was not limited to, elec-

tronic, pharmaceutical, machinery, food, chemical and air-IN THE COURSE of preparing a thesis for an ad- craft manufacturers. The companies ranged from five

vanced degree in accounting, during the summer of million to 1.4 billion dollars of annual sales and were1960, it was discovered that much of the current evenly distributed throughout this range. The survey did

literature concerning the accountant's role in the control not attempt to concentrate on any particular industryof Research and Development was of a general nature or size of company. This survey drew 51 responses whichand tended to reflect opinions, not factual data. It was is approximately 25 per cent of the total.therefore determined that a survey of industry was re- In order to improve the reliability of the data it wasquired to establish a factual basis for this paper. decided to analyze the results of the initial survey andThe survey was conducted principally through the use seek confirmation of these results in a brief, or secondary,

of questionnaires although a limited number of personal questionnaire. This second questionnaire was sent to 60different companies that were similarly diversified with

gree in accounting atSouthern Methodist Unniv°ivr sity.thisderspeconar suve wadeevdt 3824 Vanette Lane, Dallas, Texas.thsecnayurywsrcivd

180 IRE TRANSACTIONS ON ENGINEERING MANAGEMENT December

The second questionnaire merely sought confirmationof facts observed from the responses to the initial survey.For this reason the results of this secondary survey are TABLE Inrot included in the tabuilations below. RESPONSIBILITY FOR BUDGET PREPARATION

The survey of the mechanism of research controls and -=the accountant's role in effecting such controls developed Number ofthe following generalized facts: CompaniesResponsibility Reporting Percentage

1) The control of research expenditures lies largely Finance officer 1 2 6within the hands of those charged with the re- Research director or chiefsponsibility for conducting the research. engineer assisted by controller 6 15.3Engineering department 5 12.8

2) The allocation of research fuinds is often not in Research director 20 51.2accord with long-range needs for such funds. Management committee 4 10.4

Operating departments 3 7 73) The dynamic nature of research is reflected in short- O 3 7.

range, highly flexible, and often ineffective conitrols. Total 39 100.04) There is sonme evidence to support the thesis that

effective finanicial controls can be achieved and thatresearch effort is more productive when such controls TABLE II

are implemenited. THE BASIS OF THE ANNUAL BUDGET

In support- of the first statemenit made above, the Research All That Coin- Per cent Return oninformation condensed from the survey is presented in Expenditures Can Be petitive Invest-Table I. (Millions) Afforded Parity of Sales ment

It is appreciated that the quantity of response is limited N Per Per Per PerNo. cent* No. cent* No. cent* No. cent*

and that the possibility exists that this sample may notbe representative of the whole. Nevertheless, it appears 0-0.99 7 58.3 2 16.7 2 16.7 1 8.3that the research director or chief engineer, has, to a 3-5.99 5 71.4 - - - - 2 28.6large extent, been given the financial reins for his owii Over 6 4 80.0 - 1 20.0 - -

endeavors. It is not argued that such an arrangement is Total 923 71 .9 2 6.2 3 9.4 4 12.5of necessity bad. However, the advanitages of internal __-_ _ 1__ _Icontrol of research should be evaluated along with its *Percentage within expenditures group.disadvantages. The advantages of control from within,such as flexibility, intimate knowledgeability and com- TABLE IIImunicability must be contrasted with such a system's FREQUENCY OF REVISION OF RESEARCH BUDGETSone glaring weakness, namely, its lack of impartiality. __l_Certainly research decisions are not all influenced by Number of Percentageconsiderations for maintenaniee of staff and perpetuationi Companies of Companiesof the research efforts, however, the possibility of such When Revised Reporting Reporting

behavior patterns is iniherent inl any system which places As required 11 28.2conitrol in the hands of those being controlled. Quarterly 12 30.8Qui-nnarely 12 30.8The data presented in Table II indicates that over 70 Semi-annually 8 20.6

per cent of research allocations are established on the Annually 6 15.3basis of "all that can be afforded." The data indicates Total 39 100.0that basis of the annual budget for various levels of re- - - _ _search expenditures. Due to the limited number of returns,the classification by amount of research may not be too TABLE IVsignificant. However, it is interesting to note that the THE REPORTED EFFECTIVENESS OF CURRENT

method of competitive parity is used for only the smallest COST CONTROL TECHNIQUESresearch prograns. The percentage-of-sales method is usedfor only the extremes of the largest and smallest research Research Number of Number of Percentage

Expenditures Companies Companies Within Groupprograms, and the method of analysis of return oni in- (Millions) Satisfied Dissatisfied Satisfied

vestment is used3 inl all classifications with the exception 0-0.99 11 4 + 73.3of the largest groupinlg. The data indicates that both 1-2.99 5 5 I 50.0olreand small research expenditures are governled 3r- t-5.r99 8 1 ° 808.90

manaly by t,he funds available. - -Furthermore, the statistics substantiate the viewpoinlt Total 32 10 75.5

that allocations of research funds may often be out of

1962 Freeman: Current Status of Accounting in R and D 181

TABLE V changes in the actual work itself. The data presented inIMPORTANCE OF VARIOUS CONTROL FACTORS Table III indicates that budgets are revised less than

Number of Companies Reporting every six months in 65 per cent of the cases.

Factor in this Rank With such rapid changes in controls, one might expectTotal that a degree of confusion and dissatisfaction with the

1st 2nd 3rd 4th 5th Points5 4 3 2 1 for controls might result. However, this is apparently not

Factor points points points points point Factor the case as evidenced by the data supplied in Table IV.

Organization 16 7 3 2 2 124 Since the majority of addressees of this survey wereCompetency of financial officers of the companies, the possibility of bias

personnel 8 15 1 3 2 111Cost awareness in response to the above question might be suspected.

research In order to verify the reported satisfaction with the systempersonnel 1 3 10 5 7 64

Effective 1 3 1 5 of financial controls, the survey inquired into the im-budgeting 2 4 6 7 6 64 portance of various factors of control. The responses to

Adequacy offacilities 2 2 8 5 1 53 this question, shown in Table V, indicated that financial

Prompt report- controls are not as highly regarded as are such things as

Analysis and 1 4 4 2 organization and competency of personnel in establishingfollow-up control of a research program.or costs - 1 - 7 8 26

Other 2 - - - 2 12 At the start of the survey it was hypothesized that therole of the accountant would be shown to be of secondaryimportance in the control of research. It is felt that the

TABLE VI data presented in Table V verifies this hypothesis to aTHE ABILITY TO MEASURE THE PROFIT large extent. A second hypothesis stated that the inability

________ -CONTRIBUTION OF RESEARCH of present accounting techniques to measure the profita-

Number of Number of bility of research is the root reason for the imperfectResearch Companies Companies Percentage position of accounting in the control of R and D. ThisExpendi- with without Total with second hypothesis was not proven by the survey, however

tures Ability to Ability to Number of Ability to(Millions) Measure Measure Companies Measure the inability of accounting to measure the results of re-0-0.99 0 15 15 0

search and development expenditures is clearly indicated0w .99o 15 ~~15 0

1-2.99 - 11 11 in Table VI.3-5.99 3 6 9 33.3 In the author's opinion, it is significant to note that ofOvr62 6 8 25.0 the five companies reporting the ability to measure the

Total 5 38 43 11.6 profitability of research, have, without exception, placed

effective budgeting and prompt reporting of costs amongthe more important factors in the control of research.

phase with actual business requirements. For certainly the It would therefore appear that the accountant can,greatest need for research and development occurs when through the proper matching of research costs with thea company can least afford it; and, conversely, research resulting revenues, make an important contribution tocan be best afforded when it is least required. It therefore the effective control of research. And it might not be toocan be seen that the "all that can be afforded" approach much to hope that this control, rather than being re-of research budgeting which is currently in vogue will strictive in any sense, would be of a nature that wouldoften be in conflict with both long-range and short-term increase the effectiveness of the research effort, and inbusiness requirements. turn contribute to the growth of our economy which to

Financial controls applied to research and development an increasingly larger extent is influenced by the efficacyare highly flexible, as might be anticipated by the rapid of the research and development effort.