Human Resource Accounting: It involves measuring the data of human resources, the cost involved in recruiting and maintaining them, and the returns achieved from them. Methods of Human Resource Accounting are discussed below.
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Methods of Human Resource Accounting
Several methods have been in use but they all fall under 4 methods of human resource accounting:
- Historical Cost Method
- Replacement Cost Method
- Present Value Method and Economic Value Method
- Asset Multiplier Method
Historical Cost Method
Under the Historical cost method, the sum total of all the costs related to human resources is calculated to find out the value of a human resource. These costs include the cost of recruitment, selection, training, placement, and development of human resources of an organization.
Historical Cost Method was introduced by Brummet, Flamholtz and Pyle. This is the oldest method of valuation of human resource.
Types of Historical Cost Method
- Acquisition cost: It means the cost which is incurred on acquiring the human resource in the organization. The cost incurred at the time of recruitment, selection, and placement, etc.
- Learning Cost: It means that cost is incurred at the time of providing training and development to the employees and managers.
Advantage of historical cost method
- This method is very easy to calculate the value of a human resource.
- Employers and employees can easily understand this method.
- This method follows the traditional accounting concept of matching costs with revenue.
- Return on the company’s investment in human resources can easily be calculated by this method.
Disadvantage of historical cost method
- Under this method it is very different to estimate the service period of an employee.
- In this method rate of amortization is very difficult to determine.
- As we know, the value of assets decreases with an increasing number of years or amortization. But in the case of human resources, it is just the opposite. The utility of employees increases with the increasing experience and training provided to them.
Replacement Cost Method
Replacement cost is that cost which is incurred on replacing the existing human resource by an identical one i.e. human resource capable of rendering similar services.
Replacement Cost Method was introduced by Rensis Likert and Eric G. Flamholtz.
This method is different from the historical cost method.
The historical method takes into account only the sunk cost which is immaterial to calculate the value of human resources and take a decision on that basis.
The replacement cost method is very realistic as it considers the current value of human resources in its financial statement.
Advantage of replacement cost method
- This method estimates the present value of human resources. This method is very logical and representative.
- This method can easily adjust the human value of price trends and can provide real value at the time of the rise in prices.
Disadvantage of replacement cost method
- The identical replacement of an employee is not always possible to find.
- The cost of replacing the human resource is inconsistent with traditional accounting system based on the cost concept.
Present Value Method and Economic Value Method
Present value method, the future earnings of the employees are estimated up to the retirement period and is discounted at a discount rate which is usually the cost of capital.
Economic value method present worth of the employee is calculated on the basis of the future service that is expected from him till his retirement.
Under this methods value of a human resource is calculated on the basis of the contribution made by the employees in the organization till their retirement. The payment due to the employees in the form of pay, allowance, and benefit etc. are estimated and then discounted to arrive at a present economic value of the individual.
Advantage of economic value method
- Employee’s career movements are taken into account under this method.
- The possibilities of employees leaving the organization other than death or retirement are also considered.
Disadvantage of economic value method
- The service tenure of an employee is very difficult to estimate.
- The value of expected services data is very difficult to find.
- Estimation of employee’s chances of occupying various positions for each employee is not an easy task.
- Valuation of the contribution of services from employees is also not easy to judge.
- To estimate the exit probabilities and changes from one position to another is an expensive process.
Asset Multiplier Method
Asset Multiplier Methods consider that there is no direct relationship between the cost incurred on human resource and how much value he is for the organization. The value of human resources depends on various factors like the level of motivation and employee attitude towards work and the organization.
Here multiplier refers to instruments that relate personal worth of human resource to the total asset value of the organization.
Employees of the organization are divided into four categories under this method namely
- Top management
- Middle management
- Supervisor
- Clerical employees.
Asset Multiplier reflects the following factors:
- Technical, qualification and experience of employees.
- Experience required for the job.
- Personal qualities and attitude.
- Loyalty and expectation of future services.
Advantage of asset multiplier method
- This method is simple and easy to understand.
- Data for calculation is easily available.
- Multipliers used in this method are different for a different group of employees.
Disadvantage of asset multiplier method
This method considers factors like motivation, employee’s attitude which are difficult to quantify.
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