Human Resource Accounting - MBA Teaching Faculty

1. Human Resource
Accounting
Models of HR - Accounting

2. Accounting is the process through which we record the business
transactions and further analyse them to know the business results
in terms of profit and loss.

3. Human Resource Accounting
Flamhoitz define HRA is the process to measure the costs incurred
by organizations to recruit, select, hire , train and develop human
resource.
It also involves measuring the economic value in terms of payment
of salaries and other benefits paid and in return knowing their
contribution to the organization towards its profitability.

4. Objectives of Human Resources Accounting
1. Providing cost value in formation about acquiring , developing ,
allocating and maintaining human resources to the management.
2. To see whether the human resources are effectively utilized or
not.
3. Finding depreciation or appreciation among human resources.
4. To see whether the human resources are producing a return on
investment of the person interested in the organisation or not.
5. Provide human resources accounting detail to outsiders like
financers such as bankers , financial institutions and creditors.

5. Benefits of HR-ACCOUNTING:
*Information for manpower planning .
*Information for making personnel policies.
*Utilization of human resources.
*Proper Placements.
*Increase Morale and motivation.
*Attracts best Human resources
*Designing training and development programs.
*Valuation information to investors

6. Need for HR- Accounting
• It develops effective managerial decision making.
• It helps in efficient allocation of resources.
• It increases human asset productivity.
• It provides financial information of human asset.
• It helps in long term investment decisions.
• It improves their morale , cooperation , job satisfaction and
creativity.

7. HRA METHOD for Valuation
HR COST Accounting HR – VALUE Accounting
1. Historical Cost Method
2. Replacement Cost
Method.
3. Opportunity Cost
Method
1. Lev- Schwartz’s Model.
2. Flamholtz’s Model
3. Hermanson’s Model

8. Historical Cost Approach
• Given by William c. pyle, R . Lee Brummet & Eric G. Flamholtz.
• It is on the basis of actual cost incurred towards recruitment,
hiring, training and development human resources of the
organization are capitalized and amortized over the future
expected useful life of the Human resources.

9. • Replacement cost Approach:
Given by Rensis likert & Eric G. Flamholtz on the basis of concept
replacement cost.
Under this approach , the value of the employee is estimated as the
cost of replacement with a new employee of equivalent ability and
thus represents a current value approach.

10. Opportunity Cost :
Given By Heckiman and Jones.
Opportunity is cost is the value of an asset when there is an
alternative use of it.
For a company with several divisional heads bidding for the services
of various people they need among themselves and then include the
bid price in the investment cost.

11. Hermanson’s Model
• Roger H. Hermanson has suggested two models for measurement
of human resources.
• Hermanson’s Unpurchased Goodwill Model:
The value of HR is calculated by capitalizing earnings in excess of
normal earnings owned by the organizations , at a normal rate of
return.

12. • Hermanson’s Adjusted Discounted future wage model:
1. This model is based on assumption that a relationship can be
established between employee salary and his value to the
organization.
2. In this present value of discounted wages of future is calculated
for each year for coming 5 years.
3. The present value is further adjusted by efficiency ratio.
4. This efficiency ratio is weighted average of the ROI of reporting
firm to all the firms of the economy, for a fixed period.

13. The Lev and Schwartz Model:
• This model has need developed by Lev and Schwartz (1971). Accordingly
to this model , the value of Human resources is ascertained as follows:
1. All employees are classified in specified groups according to their age
and skill.
2. Average annual earnings are determined for various ranges of age.
3. The total earnings which each group will get up to retirement age are
calculated.
4. The total earnings calculated as above are discounted at the rate of
cost of capital.
5. The value will be the value of human resources/assets.

14. Flamhoitz’s Model/ Stochastic Reward Valuation
Model
• Flamhoitz was of the view that human beings cannot be purchased
or owned by the organization like other physical assets.
• They are free to either serve from one role to another in his career
or to leave the firm.

15. • He emphasized on dual aspect of an individual value.
1. The value that organization could potentially realize from his
services is he stays in the organization.
2. The other aspect refers to the value actually expected to be
derived , taking into account the person probability of leaving.
3. Present value of the HR is calculated by discounting the
monetary value of expected future services at a specified rate.