Practical approaches for engineering organizations
In This Guide You Will Learn
- What capitalization reporting actually produces: the allocation of development costs into capitalizable and operating expenses for a reporting period.
- How capitalization differs from internal project costing: and why these two goals are often confused.
- Key questions that determine the right approach: including how work is structured, how precise reporting needs to be, and whether operational proxies correlate with effort.
- A spectrum of practical models: ranging from high-level team allocation to detailed time tracking.
- How Dotwork supports these approaches: helping organizations implement a defensible and sustainable capitalization process.
The Key Output
Capitalization ultimately produces a financial allocation of development costs. When implementing software capitalization, it helps to start with the end goal. The entire process ultimately exists to produce a financial output for a given reporting period.
The output of the capitalization process is a dollar amount representing capitalizable development costs and a dollar amount representing operating expenses for a particular period such as a month or a quarter. These values are derived primarily from development salaries and related labor costs.
These figures serve a specific financial purpose. Capitalizable costs are recorded on the balance sheet as assets and are then amortized or depreciated over time as the software delivers value. Operating expenses are recorded immediately on the income statement.
The purpose of the system is not to perfectly track every minute of engineering effort. The purpose is to produce a reasonable and defensible allocation of development costs into capitalizable and operational categories for each reporting period.