human resource accounting (mba)

HUMAN RESOURCE ACCOUNTING

GROUP MEMBERS

Mayur

Prajakta

Ashwini

Savita

INTRODUCTION OF HRA“ One asset is amitted & its worth I want to know,

That asset is the value of men

Who run the show.”

DEFINITION OF HRA

Management consultant Stephen Knauf has defined HRA as:

Human resource is the measurement and quantification of organizational input such as recruiting, training experience and commitment.

The American Accounting Society Committee on HRA defines it as:

HRA is the process of identifying and measuring data about human resources and communicating this information to interested parties.

OBJECTIVES OF HRA• Improve management by analyzing investment in HR

• Provides cost value information.

• Consider people as its asset.

• Attract and retain qualified people.

• Enable management of the organization to effectively monitor the use of human resources.

•To aid in the development of management principles and proper decision making for the future.

METHODS OF HRA

I. Historical Cost Method.

II. Replacement Cost Method.

III. Opportunity Cost Method.

IV. Return On Efforts Employed Method.

V. Reward Valuation Method.

I. HISTORICAL COST METHOD

This method developed by Brummet, Flamholtz and Pyle.

This method the actual cost incurred on recruiting, selecting, placing & developing.

ADVANTAGES

This method is simple to understand and easy to work out.

The traditional accounting concept of matching cost with revenue is followed in this method.

LIMITATIONS

It is very difficult to estimate the number of years an employee will be with the firm

It is difficult to determine the number of years over which the effect of investment on employees will be realized.

II. REPLACEMENT COST METHOD

This method was developed by Renis Likert and Eric G. Falmholtz.

In this method cost of recruiting, selecting, training etc. of new employees to reach the level of competence of existing employees are measured.

ADVANTAGES

This method has the advantage of adjusting the human value of price trends in the economy and thereby provides more realistic value in inflationary times.

It has the advantage of present oriented.

LIMITATIONS

It may not always be possible to obtain such a measure for a particular employee.

It is not always possible to find out the exact replacement of an employee.

III.OPPORTUNITY COST METHOD

To overcome the limitations of replacement cost method, Hekimian and Jones Suggested the use of opportunity cost method which determine the value of human resource on the basis of an employee’s value in alternative use.

The value of an employee would be high if he has several alternative uses for employment in the various division of an enterprise.

ADVANTAGES This method ensures optional allocation of human resources.

It provides a quantitative base for planning, evaluating and developing human resources of an organization.

LIMITATIONS This method fails to accommodate the possibility of hiring of employees of similar efficiency, experience and skills.

The application of this method is doubtful unless the alternative use of an employees service available in an organization are traced out.

IV. RETURN ON EFFORTS EMPLOYED METHOD

This method measures the value of firms human resources on the basis of efforts made by the individual for organizational benefits.

Depends upon the position of employee, degree of excellence and experience.

ADVANTAGES

It makes possible inter-divisional comparison which ensures effective competition.

It assist the management in regulating the various functions of an organization.

LIMITATIONS

It is more an index of efficiency rather than a valuation method.

Management finds it difficult to measure and express the individual efforts in monetary value.

V. REWARD VALUATION METHOD

This model is developed by Flamholtz, this method seeks to measure the value of human resources on the basis of an employees value to an organization at various states (roles).

Employees value involves following steps:- a. Estimation of employees service life.

b. Identification of set of service states (roles)

c. Estimation of employees service state (roles) at specified future times.

ADVANTAGES

It is the most scientific model as it demonstrates the impact of the concept of human asset upon the management.

It is matured model as it takes into consideration the employees withdrawal from the organization earlier than death or retirement.

LIMITATIONS

This method does not indicate the method of estimating the future compensation flow of employees.

It is practically difficult to determine the probability of employees career movement within the organization and of his exit from organization.

COST OF HUMAN RESOURCES

1. Acquisition Cost

2. Training and Development Cost

3. Welfare Cost

4. Other Cost

1. ACQUSITION COST It refers to the cost incurred in acquiring the right man for the right job at the right time in a right quantity.

a) Recruitment Cost:- ex: cost of recruiting material, administrative expenses, advertising

costs, agency fees, recruiters salary and travel and outside cost.

b) Selection Cost:- ex: cost of application banks, administrative cost of processing

applications, conducting tests and interviews, medical examinations and salaries.

c) Placement Cost: ex: depends upon the placement, individuals ability and attitude.

2. TRAINING & DEVELOPMENT COST

It refers to the sacrifice that must be made to train a person either to provide expected level of performance or to enrich individuals skills.

a) Formal Training Cost: refers to the cost incurred in conventional training for the

orientation of an individual.

b) On the Job Training Cost: once the employee is placed on the job, he must be trained to

do job efficiently and effectively.

2. TRAINING & DEVELOPMENT COST

C) Special Training Cost: To achieve the performance standards sometimes special

training programmers may be devised.

d) Development Programmers: Employees may be allowed to participate in development

programs may range from ordinary lectures to international conferences and seminars. Involves cost such as delegated fees, travel cost, loss output etc.

3. WELFARE COSTA vital function of an employer to provide an atmosphere to the employees to perform their work in healthy, congenial climate conducive to good health and high morale.

a) Welfare Amenities Within The Organization: ex: creches, rest shelters and canteens, latrines and urinals,

washing and bathing facilities, drinking water and occupational safety etc.

b) Welfare Outside The Organization: ex: Social insurance measures, maternity benefits, medical

facilities, educational facilities, housing, holiday homes and leave , travel facilities etc.

4. OTHER COSTSIn India, Factories Act 1948 has made statutory provisions wit regard to employees health, safety and welfare as follows:

I. Health Of Workers:• Cleanliness, disposal of waste and effluents• Ventilation and temperature• Dust and fumes• Over crowding• Lighting• Drinking water• Latrines and urinals

4. OTHER COSTSII. Safety Of The Workers:• Fencing of machinary• Hoist and lifts • Pressure plant• Precaution against danger fumes.

III. Welfare of Workers:• Washing facilities• Facilities for storing and drying clothing• First aid appliances• Canteens • Welfare officers

EVALUATION OF HUMAN RESOUCE ACCOUNTING

Example: A firm has started its business with a capital of Rs.10,00,000.

It has purchased fixed assets worth Rs.5,00,000 in cash. It has kept Rs.2,60,000 as

working capital and incurred Rs.2,40,000 on recruiting, training and developing the engineers and few workers.

The value of engineers and workers is assessedat Rs.8,00,000.

Liabilities Rs. Assets Rs.

Capital

Human Assets Capital

10,00,000

8,00,000

Fixed Assets

Human Assets:(i) Individuals’ Value(ii) Value of Firm’sInvestments

Current Assets

5,00,000

8,00,0002,40,000

2,60,000

18,00,000 18,00,000

BALANCE SHEET

ADVANTAGES OF HRA

Helps in the employment, locating and utilization of human resources.

Helps in deciding the transfers, promotion, training and retrenchment

Provides valuable information to person in making long term investment.

Helps in identifying improper utilization oh human resource.

Helps in identifying the causes of high labor turnover.

DISADVANTAGES OF HRA

The valuation of human assets is based on assumptions

The HRA may leads to dehumanization.

No standards of HRA

Employee with a comparatively low value may feel discouraged.