Non-recurring engineering

Last updated

Non-recurring engineering (NRE) refers to the one-time cost to research, design, develop and test a new product or product enhancement. When budgeting for a new product, NRE must be considered to analyze if a new product will be profitable. Even though a company will pay for NRE on a project only once, NRE costs can be prohibitively high and the product will need to sell well enough to produce a return on the initial investment. NRE is unlike production costs, which must be paid constantly to maintain production of a product. It is a form of fixed cost in economics terms. Once a system is designed any number of units can be manufactured without increasing NRE cost. NRE can be also formulated and paid via another commercial term called Royalty Fee. The Royalty Fee could be a percentage of sales revenue or profit or combination of these two, which have to be incorporated in a mid to long term agreement between technology supplier and the OEM.

Research systematic study undertaken to increase knowledge

Research is "creative and systematic work undertaken to increase the stock of knowledge, including knowledge of humans, culture and society, and the use of this stock of knowledge to devise new applications." It is used to establish or confirm facts, reaffirm the results of previous work, solve new or existing problems, support theorems, or develop new theories. A research project may also be an expansion on past work in the field. Research projects can be used to develop further knowledge on a topic, or in the example of a school research project, they can be used to further a student's research prowess to prepare them for future jobs or reports. To test the validity of instruments, procedures, or experiments, research may replicate elements of prior projects or the project as a whole. The primary purposes of basic research are documentation, discovery, interpretation, or the research and development (R&D) of methods and systems for the advancement of human knowledge. Approaches to research depend on epistemologies, which vary considerably both within and between humanities and sciences. There are several forms of research: scientific, humanities, artistic, economic, social, business, marketing, practitioner research, life, technological, etc. The scientific study of research practices is known as meta-research.

A design is a construction or activity specification or plan, or the result of that plan in the form of a prototype, finished product, or process. "To design" as a verb expresses the process of developing such a design. In some cases, the direct construction of an object without an explicit prior plan is also considered to be a design activity. The same word is also used for the broad discipline of design creation, which spans engineering and applied art. Major examples of design include architectural blueprints, engineering drawings, business processes, circuit diagrams, and sewing patterns.

Research and development general term for activities in connection with corporate or governmental innovation

Research and development, known in Europe as research and technological development (RTD), refers to innovative activities undertaken by corporations or governments in developing new services or products, or improving existing services or products. Research and development constitutes the first stage of development of a potential new service or the production process.

In a project-type (manufacturing) company, large parts (possibly all) of the project represent NRE. In this case the NRE costs are likely to be included in the first project's costs, this can also be called research and development (R&D). If the firm cannot recover these costs, it must consider funding part of these from reserves, possibly take a project loss, in the hope that the investment can be recovered from further profit on future projects.

Reserve (accounting) accounting

In financial accounting, "reserve" always has a credit balance and can refer to a part of shareholders' equity, a liability [Reserve for Claims better called Liability for Estimated Claims], or an asset contra account [Reserve of Uncollectible Accounts, better called Allowance for Uncollectible Accounts].

The concept of full product NRE as described above may lead readers to believe that NRE expenses are unnecessarily high. However, focused NRE wherein small amounts of NRE money can yield large returns by making existing product changes is an option to consider as well. A small adjustment to an existing assembly may be considered, in order to use a less expensive or improved subcomponent or to replace a subcomponent which is no longer available. In the world of embedded firmware, NRE may be invested in code development to fix problems or to add features where the costs to implement are a very small percentages of an immediate return. Chrysler found such a way to repair a transmission problem by investing trivial NRE dollars into computer firmware to fix a mechanical problem to save some tens of millions of dollars in mechanical repairs to transmissions in the field.[ citation needed ]

NRE-concepts-as-financial-investments are loss control tools considered part of manufacturing profit enhancement.

Related Research Articles

Cost accounting financial term

Cost accounting is the process of recording, classifying, analyzing, summarizing, and allocating costs associated with a process,after that developing various courses of action to control the costs. Its goal is to advise the management on how to optimize business practices and processes based on cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

In finance, the net present value (NPV) or net present worth (NPW) applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount rate. NPV accounts for the time value of money. It provides a method for evaluating and comparing capital projects or financial products with cash flows spread over time, as in loans, investments, payouts from insurance contracts plus many other applications.

A royalty is a payment made by one party, the licensee or franchisee to another that owns a particular asset, the licensor or franchisor for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation. A royalty interest is the right to collect a stream of future royalty payments.

Break-even (economics) Equality of costs and revenues

The break-even point (BEP) in economics, business—and specifically cost accounting—is the point at which total cost and total revenue are equal, i.e. "even". There is no net loss or gain, and one has "broken even", though opportunity costs have been paid and capital has received the risk-adjusted, expected return. In short, all costs that must be paid are paid, and there is neither profit nor loss.

Total benefits of ownership (TBO) is a calculation that tries to summarise the positive effects of the acquisition of a plan. It is an estimate of all the values that will affect a business. It is a financial estimate intended to help buyers and owners determine the direct and indirect benefits of a product or system. It is used to determine potential Return on Investment (ROI). The usage of TBO may lead to increase in efficiency and productivity of a business, improvements in decision-making or improvements in the workforce. It helps to identify important areas which a business should be focusing on, as well as uncovering the hidden aspects of the decisions made by the firm.

In economics and finance, the profit rate is the relative profitability of an investment project, a capitalist enterprise or a whole capitalist economy. It is similar to the concept of rate of return on investment.

Activity-based costing method of measuring economic consumption

Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing.

Net income entitys income minus cost of goods sold, expenses and taxes for an accounting period

In business and accounting, net income is an entity's income minus cost of goods sold, expenses and taxes for an accounting period. It is computed as the residual of all revenues and gains over all expenses and losses for the period, and has also been defined as the net increase in shareholders' equity that results from a company's operations. In the context of the presentation of financial statements, the IFRS Foundation defines net income as synonymous with profit and loss. The difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments. This is different from operating income.

Profit margin, net margin, net profit margin or net profit ratio is a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.

In finance, leverage is any technique involving the use of debt rather than fresh equity in the purchase of an asset, with the expectation that the after-tax profit to equity holders from the transaction will exceed the borrowing cost, frequently by several multiples⁠ ⁠— hence the provenance of the word from the effect of a lever in physics, a simple machine which amplifies the application of a comparatively small input force into a correspondingly greater output force. Normally, the lender will set a limit on how much risk it is prepared to take and will set a limit on how much leverage it will permit, and would require the acquired asset to be provided as collateral security for the loan. For example, for a residential property the finance provider may lend up to, say, 80% of the property's market value, for a commercial property it may be 70%, while on shares it may lend up to, say, 60% or none at all on certain volatile shares.

Gross margin relating gross profits to net sales

Gross margin is the difference between revenue and cost of goods sold (COGS) divided by revenue. Gross margin is expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold. Gross Margin is often used interchangeably with Gross Profit, but the terms are different. When speaking about a monetary amount, it is technically correct to use the term Gross Profit; when referring to a percentage or ratio, it is correct to use Gross Margin. In other words, Gross Margin is a percentage value, while Gross Profit is a monetary value.

A structured product, also known as a market-linked investment, is a pre-packaged structured finance investment strategy based on a single security, a basket of securities, options, indices, commodities, debt issuance or foreign currencies, and to a lesser extent, derivatives. The variety of products just described demonstrates that there is no single, uniform definition of a structured product. A feature of some structured products is a "principal guarantee" function, which offers protection of principal if held to maturity. For example, an investor invests $100, the issuer simply invests in a risk-free bond that has sufficient interest to grow to $100 after the five-year period. This bond might cost $80 today and after five years it will grow to $100. With the leftover funds the issuer purchases the options and swaps needed to perform whatever the investment strategy calls for. Theoretically an investor can just do this themselves, but the cost and transaction volume requirements of many options and swaps are beyond many individual investors.

Revenue recognition

The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned, no matter when cash is received. In cash accounting – in contrast – revenues are recognized when cash is received no matter when goods or services are sold.

Flipping is a term used primarily in the United States to describe purchasing a revenue-generating asset and quickly reselling it for profit. Though flipping can apply to any asset, the term is most often applied to real estate and initial public offerings (IPOs).

In finance, a collar is an option strategy that limits the range of possible positive or negative returns on an underlying to a specific range. A collar strategy is used as one of the ways to hedge against possible losses and it represents long put options financed with short call options.

For the application of engineering economics in the practice of civil engineering see Engineering economics.

Royalty rate assessment is a practical tool to gauge the impact of a royalty commitment in a technology contract to the business interests of the contracting parties. In this coverage, the terms 'royalty', 'royalty rate' and 'royalties' are used interchangeably.

Overhead (business) overhead

In business, overhead or overhead expense refers to an ongoing expense of operating a business. Overheads are the expenditure which cannot be conveniently traced to or identified with any particular cost unit, unlike operating expenses such as raw material and labor. Therefore, overheads cannot be immediately associated with the products or services being offered, thus do not directly generate profits. However, overheads are still vital to business operations as they provide critical support for the business to carry out profit making activities. For example, overhead costs such as the rent for a factory allows workers to manufacture products which can then be sold for a profit. Such expenses are incurred for output generally and not for particular work order; e.g., wages paid to watch and ward staff, heating and lighting expenses of factory, etc. Overheads are also very important cost element along with direct materials and direct labor.

Front-End Engineering (FEE), or Front-End Engineering Design (FEED), is an engineering design approach used to control project expenses and thoroughly plan a project before a fix bid quote is submitted. It may also be referred to as Pre-project planning (PPP), front-end loading (FEL), feasibility analysis, or early project planning.

A royalty fund is a category of private equity fund that specializes in purchasing consistent revenue streams deriving from the payment of royalties. One growing subset of this category is the healthcare royalty fund, in which a private equity fund manager purchases a royalty stream paid by a pharmaceutical company to a patent holder. The patent holder can be another company, an individual inventor, or some sort of institution, such as a research university.