The main methods of measuring the value of human resources are given below: Show
1. Historical or Actual Cost Method. ( developed by William C. Pyle and R.G. Barry Corporation). It is on the basis of actual cost incurred on human resources. Under this method, the amount actually spent on the recruitment, familiarization and development of employees is capitalized and amortized over the period for which the benefits are expected to flow to the organization. Certain part of costs will be written off in proportion to the income of the future years which those human resources will provide service. When these human assets are prematurely liquidated, the amount not written off is charged to income of the year in which such liquidation takes place. Outlays which are not having value beyond the current accounting period are treated as operating expenses. Costs on recruitment, selection and placement are called acquisition costs while the costs of orientation and training are known as learning costs. Advantage i. It is very simple in its application. ii. The effect of human resource accounting can be shown on conventional Balance Sheet and Loss Account because the information in these statements is also stated on historical cost basis. Disadvantage i. It is difficult to estimate the number of years over which the capitalized expenditure is to be amortized. ii. It considers only the employee’s acquisition cost and ignores the aggregate value of their potential services. iii. It is difficult to determine the rate of amortization. iv. The economic value of human resources increases over time as the people gain experience. But in this approach, the capital cost decreases through amortization. 2. Replacement Cost Method (1st suggested by Rensis Likert, was developed by Eric G. Flamholtz) Under this method, human assets are valued at which it would cost the organisation to replace the existing human resources with human resources capable of rendering equivalent services. In calculating the replacement cost, both acquisition and learning costs are taken into account. It includes communication of job ability, pre-employment administrative functions, interviews, testing, staff meetings, travel cost, employment medical examination etc. As against historical cost methods which take into account the actual cost incurred on employees, replacement cost takes into account the notional cost that may be required to acquire a new employee to replace the present one. Replacement cost is generally much higher than the historical cost. Advantage i. This approach is more realistic as it incorporates the current value of company’s human resources in its financial statements prepared at the end of the year. Disadvantage i. The replacement value is affected by subjective considerations and therefore the value is likely to differ from one another. ii. It is not always possible to find out the exact replacement of an employee. iii. This method does not reflect the knowledge, competence and loyalties concerning an organization that an individual can build over time. 3. Standard Cost Method (David Watson suggested this method) Instead of using historical or replacement cost, many companies use standard cost for the valuation of human assets just as it is used for physical and financial assets. Under this method, employees of an organization are categorized into different groups based on their hierarchical positions. Standard cost is fixed for each category of employees and their value is calculated. This cost is updated every year. Replacement costs can be used to develop standard costs of recruitment, training and developing individuals. Advantage i. It is quite simple method. Disadvantages: i. It fails to take into account differences in employees put in the same group. In many cases, these differences could be very vital. 4. Current Purchasing Power MethodUnder it, instead of taking the replacement cost to capitalise, the capitalised historic cost of investment in human resources is converted into current purchasing power of money with the help of index numbers. Advantage i. It is simple method. Disadvantage i. It is difficult to find suitable index in the changing scenario therefore, this method may not be representative of actual value of human resources. 5. Present Value Method or Economic Cost Method Under this method the future earnings of various grades of employees are estimated upto the age of retirement and are discounted at the rate of cost of capital to obtain their present value. The model may be expressed as follows:  Values are arrived at on the basis of average earnings for each category of employees. Steps involved i. All employees are classified in specific groups according to their age and skill. ii. Average annual earnings are determined for various ranges of age. iii. The total earnings which each group will get upto retirement age are calculated. iv. The total earnings calculated as above are discounted at the rate of cost of capital. The value thus arrived at will be the value of human resources/assets.
These MCQs are helpful in understanding the Methods of Human Resource Accounting. Solve these MCQs carefully and check your knowledge 1. Which method of Human Resource Accounting states that only scarce people should comprise the value of human resources?
3. Opportunity Cost Method The Opportunity Cost Method values human resources on the basis of the economic concept of opportunity cost. The opportunity cost is linked with scarcity. A human resource asset has a value only when it is scarce i.e. its employment in one division is possible and not in another division. “The investment centre managers will bid for the scarce employees they need to recruit. 2. The Lev and Schwartz model of Human resource accounting was developed in the yearThe Lev and Schwartz model of Human resource accounting was developed in the year 1971 and it involves determining the value of human resources according to the present value of estimated future earnings discounted by the Cost of Capital. 3. Which model of Human resource accounting is an extension of Lev and Schwartz model and considers the movement of an employee from one role to another in his career
Eric Flamholtz Model is an extension of the Lev and Schwartz model since it considers the possibility of an employee’s movement from one job position to another job position during his career or leaving the firm due to death or retirement. 4. Which model of Human Resource Accounting suggests that the valuation of human resources should be made in the same way as other business assets on a going concern basis?
4. Giles and Robinson’s Model Giles and Robinson’s Model, also known as Human Asset Multiplier method uggests that the valuation of human resources should be made in the same way as other business assets on a going concern basis 5. The Historical Cost Approach of Human Resource Accounting is given by
1. Brummet, Flamholtz and Pyle Historical cost approach was developed by Brummet, Flamholtz and Pyle. Under this method, the amount spent on the recruitment and development of employees is capitalised and amortised over the period for which the benefits are expected to flow to the organisation. 6. Replacement Cast Approach of Human Resource Accounting suggests that
2. The cost of replacing employees is used as the measure of company’s human resources. According to this model, the cost of replacing employees is used as the measure of company’s human resources. The human resources of a company are to be valued on the assumption as to what it will cost the concern if existing human resources are required to be replaced. 7. Certainty Equivalent Net Benefits model of Human Resource Accounting is given by
Pekin Ogan gave the Certainty Equivalent Net Benefits model in the year 1976. According to this model, the certainty with which the net benefits in the future will accrue should also be taken into account while determining the value of human resources. Ogan considers both cost and benefit aspects of the value of human resources to an organisation. 8. Who suggested the ‘adjusted discounted future wages model’ of Human Resource Accounting ?
Hermanson has suggested the ‘adjusted discounted future wages model whereby the discounting of future compensations with an adjustment is made with the use of ‘efficiency ratio’ to determine the value of an individual. 9. Hekiaman and Jones competitive bidding model is also known as
1. Opportunity Cost Method Hekimian and Jones competitive bidding model suggests for competitive bidding process of the scarce employees in an organisation. 10. Which of the following is wrongly matched
All are correctly matched. 11. Which of the following is wrongly matched
3. Stochastic Rewards Valuation Model – N. Dasgupta 12. The first Indian professor to suggest a model for valuation of human resources of an organisation is
S K Chakraborty (1976) is the first Indian to suggest a model for the value of Human resources of an organization. According to his Aggregate Payment model, the group of employees has to be assessed rather than individuals in the valuation of human resources 13. Fixing the value of an employee depending upon his productivity, promotability, transferability and retainability is the core of the
4. Stochastic Reward Valuation model The Flamholtz’s stochastic rewards valuation model identifies the major variables which determine the value of an individual to the organisation. The model advocates that a person generates value for an organisation as he occupies and plays different roles and renders services to the organisation. 14. When the cost incurred on recruiting, training and developing the employees is considered for determining the value of employees, it is called
2. The historical cost approach In historical cost approach approach, actual cost incurred on recruiting, hiring, training and development the human resources of the organisation are capitalised and amortised over the expected useful life of the human resources. Thus a proper recording of the expenditure made on hiring, selecting, training and developing the employees is maintained and a proportion of it is written off to the income of the next few years during which human resources will provide service. Major Readingswww.yourarticlelibrary.com www.yourarticlelibrary.com2 whatishumanresource.com www.geektonight.com www.iedunote.com www.toppers4u.com |
A major drawback of the historical cost approach method of valuing human capital asset is
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