Question Of The Week

• Explanation

Costs associated with developing commercial software (ie, software not exclusively for internal use) are accounted for based on the program's development timeline and technological feasibility. Technological feasibility is the point at which the software can be produced to meet its intended purpose (ie, working prototype exists). These costs are accounted for as follows:

• Costs incurred prior to technological feasibility are expensed as R&D because it is uncertain whether the future economic benefits of these costs will be realized.
• Costs incurred after technological feasibility and before any sales are capitalized.
• Noninventoriable costs incurred after the software is available to customers are generally expensed as non-R&D operating expenses.

In this scenario, R&D expenses include those incurred before technological feasibility and consist of the following:

(Choice A) R&D expenses of $200,000 incorrectly exclude the product testing costs.

(Choice C) R&D expenses of $400,000 erroneously include the maintenance and customer support costs. These costs are operating expenses and incurred after the product is available for release.

(Choice D) R&D expenses of $475,000 incorrectly include the cost of producing product masters. Product masters are produced only after technological feasibility has occurred.

Things to remember:
Technological feasibility is the point at which commercial software can be produced to serve its intended purpose. Planning, design, and testing costs incurred before technological feasibility are expensed as R&D because it is uncertain whether the future economic benefits of these costs will be realized.