Capitalization vs. Project Costing
Two separate objectives that are often conflated
Organizations frequently mix together two separate objectives when designing capitalization systems.
- Financial capitalization reporting determines how much development effort should be capitalized versus expensed.
- Internal operational reporting attempts to understand the cost of individual projects or initiatives.
These two objectives often use similar inputs but serve very different purposes.
Capitalization reporting is required for financial accounting. Companies must be able to explain how development costs are allocated between capitalizable work and operational work. Internal initiative costing, however, is optional. Some organizations want to know the precise cost of each initiative. Others place much less emphasis on this level of analysis.
Common Misconceptions
Because these goals are often conflated, teams sometimes assume that detailed project costing is required in order to support capitalization. In reality this is not always the case. For example, including project codes in work items can help determine whether effort is capitalizable without necessarily calculating the full cost of each initiative.
Another common misconception is that accounting standards require timecards. In practice, there is no legal requirement to track time using timesheets. Accounting standards require a defensible method for allocating costs, but they do not prescribe how organizations must collect the data. This flexibility allows companies to design an approach that reflects how their teams actually work.