Opportunity cost, standard cost, current purchase cost, and power and economic cost method

1

OPPORTUNITY COST, STANDARD COST,
CURRENT PURCHASE COST, AND
POWER AND ECONOMIC COST
METHOD

BY
MANISHA VAGHELA
vaghela_manish
a13@yahoo.co
m

Flow of presentation
2 Meaning of Human Recourse Accounting (HRA)

 Definition Of HRA

 Importance of HRA

 Objectives of HRA

 Opportunity cost method
• Advantages

• Disadvantages

 Standard cost method
• Advantages
vaghela_manisha13@yahoo.c
• Disadvantages om

 Current purchase power method
3 • Advantages

• Disadvantages

 Economic Value method
• Advantages

• Disadvantages

 Conclusion

om

Meaning of HRA
4
Human Resource Accounting (HRA) means to
measure the cost and value of the people (i.e. of
employees and managers) in the organization. It
measures the cost incurred to recruit, hire, train and
develop employees and managers.

HRA also finds out the present economic value of its
employees and managers. After measuring the cost and
value of its employees and managers, the organization
prepares a report.
vaghela_manish
a13@yahoo.co
m

5

This report is called HRA Report. It is shown to the top
level management. It can also be shown to the
employees, managers and outside investors.

om

Definition Of HRA
6
 The American Accounting Association has defined HRA
as ‘the process of identifying and measuring data about
human resources and communicating information to
interested parties.’
 According to Woodruff Jr., VP of R.G. Barry Corporation
U.S.A, “HRA is an attempt to identify and report
investment made in human resources of an organization
that are not accounted for under conventional accounting
practice. Its an information system that tells the
management what changes over time are occurring to
om

 Human resource Accounting is the process of
7
identifying and reporting the Investments made in the
Human Resources of an Organization that are presently
not accounted for in the conventional accounting
practices. In simple terms, it is an extension of the
Accounting Principles of matching the costs and
revenues and of organizing data to communicate
relevant information in financial terms.

om

Position of HRA in India
8

In India, very few companies use HRA. HRA is
not compulsory in India. Infosys Technologies
and BPL are the leading companies in India,
which use HRA. HRA reports give useful
information to the company management,
employees and investors.

om

Importance of HRA
9 Human Resource Accounting provides useful
information to the management, financial analysts and
employees as stated below:-

 Human Resource Accounting helps the management in
Employment and utilization of Human Resources.

 It helps in deciding transfers, promotion, training and
retrenchment of human resources

 It provides a basis for the planning of physical assets vis-
a-vis human resources
om

 It helps in evaluating the expenditure incurred for
10
imparting further education and training of employees in
terms of the benefits derived by the firm.

 It helps to identify the causes of high labour turnover at
various levels and taking preventive measures to contain
it.

 It helps in locating the real cause for low return on
investment, like improper or under-utilization of physical
assets or human resources or both.

 It provides valuable information for persons interested in
om
making long term investments in the firm.

Objectives of HRA
11
 Provide cost value information about acquiring,
developing, allocating and maintaining human resources
so as to meet organizational goals.

 Enable management to effectively monitor the use of
human resources.

 Find whether human assets are appreciating or
depreciating over a period of time.

 Assist in the development of effective management
practices by classifying the financial consequences of
om
various practices.

12

om

13  In order to overcome the limitations of replacement
cost method, Hekimian and Jones suggested the use
of opportunity cost method.

 It determines the value of human resource on the
basis of an employee’s value in alternative uses.

 Accordingly the value of an employee is based on
his opportunity cost – the price other divisions are
willing to pay for the services of an employee working
in another division of an organization.
om

14

 This brings to light an important fact that the
opportunity cost is liked with scarcity.

 This method determines the value of human
resources by establishing competitive bidding within
an organization.

 This model envisages the computation of
monetary value and the allocation of people to the
most promising activity.
om

15
 For example: The opportunity cost of going to college
is the money you would have earned if you worked
instead. On the one hand, you lose four years of salary
while getting your degree; on the other hand, you hope to
earn more during your career, thanks to your education, to
offset the lost wages.

 If a gardener decides to grow carrots, his or her
opportunity cost is the alternative crop that might have
been grown instead (potatoes, tomatoes, pumpkins, etc.).
om

16
In both cases, a choice between two options must be
made. It would be an easy decision if you knew the end
outcome; however, the risk that you could achieve
greater "benefits" (be they monetary or otherwise) with
another option is the opportunity cost.

om

Opportunity cost is expressed in relative price, i.e., the
17 price of one choice relative to the price of another.

 Example: if milk costs $4 per gallon and bread costs
$2 per loaf, then the relative price of milk is 2loaves of
bread. If a consumer goes to the grocery store with only
$4 and buys a gallon milk with it, then one can say that
the opportunity cost of that gallon of milk was 2 loaves of
bread (assuming that bread was next best alternative )

om

Advantages
18

 This method ensures optional allocation of human
resources.

 It provides a quantitative base for planning, evaluating
and developing human resources of an organization.
Development in human resource can easily be made on
the basis of the information of this method.

om

Limitation
19
 This method fails to accommodate the possibility of
hiring of employees of similar efficiency, experience
and skill.

 It excludes from its purview those members of the
firm’s human resources who are not scare and ,
therefore, are not being bid by other divisions of the
organization.

 The application of this method is doubtful the
alternative uses of an employee’s service available
om

20

om

 This method envisages establishment of a standard cost
21
per grade of employee, updated every year.

 Variances produced should be analyzed and would form
a useful basis for control.

 Replacement costs can be used to develop standard
costs of recruitment, training and developing individuals,
such standards can be used to compare actual results
with those planned.

om

 A standard cost has two components: a standard and a
22
cost. A standard is like a norm and whatever is
considered normal can generally be accepted as
standard.

 For example, if a score of 72 is the standard for a golf
course, a golfer's score is judged on the basis of this
standard. In industry, the standards for making a desk,
assembling a radio, refining crude oil, or manufacturing
railway cars are based on carefully determined
quantitative and qualitative measurements and
om
engineering methods.

 A standard must be though of as a norm in terms of
specific items, such as pounds of materials, hours of
23

labor required, and percentage of plant capacity to be
used.

 In many firms, a standard can be operative for a long
time. A change is needed only when production or the
products themselves have become obsolete or
undesirable.

om

Advantages
24  The use of standard costs is a key element in a
management by exception approach. If costs remain
within the standards, Managers can focus on other
issues. When costs fall significantly outside the
standards, managers are alerted that there may be
problems requiring attention. This approach helps
managers focus on important issues.
 Standards that are viewed as reasonable by employees
can promote economy and efficiency. They provide
benchmarks that individuals can use to judge their own
om
performance.

25
 Standard costs can greatly simplify bookkeeping. Instead
of recording actual co0sts for each job, the standard
costs for materials, labor, and overhead can be charged
to jobs.

 Standard costs fit naturally in an integrated system of
responsibility accounting. The standards establish what
costs should be, who should be responsible for them,
and what actual costs are under control.

om

Disadvantages
26
 Standard costing system may be tedious, expensive
and time consuming to install and keep up to date.

 The standard costing system controls the operating part of
an organization only as it ignores the other items like
quality, lead-time, service, customer satisfaction and so
on.

 The standard costing system will become less useful in
om
modern factories where the just in time principles are

27
 The standard costing system may not be applicable in
case of small firms as it requires high degree of skill.

 The standard costing may not be very effective in those
organizations where non-standardized products are
manufactured and services are rendered.

om

28

om

 Under it, instead of taking the replacement cost to
29 capitalized, the capitalized historic cost of investment in
human resources is converted into purchasing power of
money with help of index numbers.

 Its great advantage is its simplicity even though it might
produce only approximate answers and approximately
correct data.

 To evaluate an investment which has cash inflows and/or
outflows spread over several years it is necessary to take
account of the time value of money.
om

That is because a sum to be received in the future is
worth less than the same amount received now because
30

the amount received now can be invested immediately.
Thus it will grow through earning interest to be a bigger
amount at the date when the future amount is received.

 To equate the cash flows in such an investment they
must all be adjusted to their current purchasing power.
This is called discounting and can be done with present
value tables which supply discount factors for all likely
rates of interest over a range of years.

om

Advantages

31
CPP method adopts the same unit of measurement by
taking into account the price changes.

 Under CPP method, historical accounts continue to be
maintained. CPP statements are prepared on
supplementary basis.

 CPP method facilitates the calculation of gain or loss in
purchasing power due to the holding of monetary items.

 CPP method uses common purchasing power as measuring
unit. So, the comparative study is easy.
om

Disadvantages
32
 CPP method considers only the changes in general
purchasing power. It does not consider the changes in the
value of individual items.

 CPP method is based on statistical index number which can
not be used in an individual firm.

 It is very difficult to choose a suitable price index.

 CPP method fails to remove all the defects of historical cost
accounting system.

om

33

om

 Economic valuation method considers the present worth
34
of the employee’s future service expected to be derived
during their stay with the organization as the value of
firm’s human resource.

 There are some resemblances between earlier model
i.e., capitalization of salary method and this model, yet
differ with each other. The economic valuation model
recommends the capitalization.

om

 According to economic valuation method, the value of
35 human resources is determine on the basis of the
expected services of the employees in each service sate
that they may occupy during their association with the
organization.

 Under this method, the valuation of human resources
involves the following steps:

1. Estimation of employees future services;

2. Multiply step 1)by the employee’s rate of pay

3. Multiply step 2) by the rate of return on investment.
This would give the present worth of employee’s
om

Advantages
36

 This model takes into consideration the employee’s
career movements.

 If employees leave enterprise on account of the reasons
other than death and retirement, then such possibilities
are also considered in this model.

 This model is regarded better than Lev and Schwartz
model due to above two types of inclusion in this model.

om

Disadvantages
37
 Estimation of the probabilities for each employee’s
occupying various positions and valuation of contribution
of services from all these positions is not an easy task.

 To estimate exit probabilities and changes from one
position to another is an expensive process.

 It is difficult to estimate an employee’s expected tenure of
service.

 It is also difficult to find out valid data about the value of
expected to be rendered service by an employee.
om

Conclusion
38
Here by, we end our presentation by concluding
that to over the limitations of replacement cost
method, opportunity cost came into existence .
Standard cost of an employee is mainly decided by
recruiting, training and developing individuals. In,
Cpp method historic cost of investment in human
resources is converted into purchasing power of
money. Economic value method is mainly done to
know the present worth of the employee’s service
om

Questions
39

1) Give an example of your own about opportunity
cost.

2) What do you understand by standard cost?

3) What is economic value method mainly based
upon?

4) Which method is historic cost converted into?

5) Opportunity cost is expressed in which price?
om

40

Thank you

om

Opportunity cost, standard cost, current purchase cost, and power and economic cost method

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (20)

Similar to Opportunity cost, standard cost, current purchase cost, and power and economic cost method

Similar to Opportunity cost, standard cost, current purchase cost, and power and economic cost method (20)

More from SMART LEARNING -SEE YOUR WORLD IN DIFFRENT WAY

More from SMART LEARNING -SEE YOUR WORLD IN DIFFRENT WAY (20)

Recently uploaded

Recently uploaded (20)

Opportunity cost, standard cost, current purchase cost, and power and economic cost method