Here we will discuss the complete methods of human resource accounting in detail. If you want to measure accounting then you need to implement the right methods at the right place.
Methods of Human Resource Accounting
There are many methods that are used to support accounting for human resources. Also, methods of human resource accounting is classified under two major categories:
1. Monetary Measurement Methods
2. Non-Monetary Measurement Methods
1. Monetary Measurement Methods
Methods of measuring money are designed to assess the value of individuals as organizational resources in terms of monetary. Methods for measuring the value of money are in the following order and these are the very crucial methods of human resource accounting for monetary measurements.
1) Historical Cost Method
Historical cost is the expense incurred during the development and acquisition of human capital over a long period, which is then merged to determine the actual costs of the HR asset and calculate the depreciation costs of human resources. This method is where HR resources are treated similarly to physical resources.
If any portion of a physical possession expires and the value of that expiring portion is deducted from the value of the physical asset. In the same way, an amount of the worth of an employee’s earnings is depreciated each year to offset the cost against the gains made. The expenses incurred for the recruitment process and training. Promotion, development, and more. These are considered to be the cost of investing in human resources. They decrease each year until the employee remains with the company.
2) Replacement Cost Method
Rensis Likert and Eric G. Flamholtz introduced this method to calculate the worth of employees in an organization by evaluating the expense incurred in replacing employees currently employed with new employees. In this approach, the management decides on the expense when current employees will be replaced with qualified and competent people. In addition, their recruitment cost and training costs, as well as development costs and cost of selection, are as well determined. Historical cost method that relies on the growing cost of employees instead of their historical worth.
3) Opportunity Cost Method
Opportunity cost approaches give importance to human resources since it is founded on the ‘opportunity costs theory in economics. Hekimian and Jones created this strategy when they noticed the willingness of different managerial employees to recruit a significant number of people and then add their worth to the base of investment. The concept of opportunity cost clearly correlates with the lack of human resources and opportunity cost. It is a very essential methods of human resource accounting for monetary measurements.The surplus employees and those at the top don’t have an opportunity cost. Therefore, the opportunity cost method can only be applied to some human resources.
4) Capitalisation of Salary Method
The method was devised in the work of Lev and Schwartz in 1971. It’s also known as the present value of the earning model. According to the researchers, there was a strong relationship between the employee’s wage and the employee’s importance to the organization. This technique was built on two assumptions, one of which was that the future earnings of an employee could be used to substitute for his current value, and secondly, that the employee would be able to stay with the organization until retirement. This strategy consists of these steps.
i) Employees divide into groups based on their experience, age, skills, etc.). The annual earnings can be calculated for each group of employees.
ii) The actual value for each group over future income is calculated with the correct discount rate. Many well-known companies like Bharat Heavy Electricals Limited. (BHEL), Cement Corporation of India (CCI). Steel Authority of India (SAIL). Southern Petrochemicals Industrial Corporation Ltd. (SPIC), Infosys, etc., have adopted this approach to evaluate HR.
5) Economic Valuation Method
The economic valuation technique is another method use to determine the value of human resources within an organization. This method determines the future earnings earned by employees within their work. This is subtract from the cost they incur on different duties like recruiting, selection, training, etc. The result of this computation is the financial cost for the employees. These are the best methods of human resource accounting for monetary measurements.
6) Return on Efforts Employed Method
The return or benefit of an organization entirely depends on the efforts performed by employees of that company. In this way, the company employees provide benefits in terms of profit and productivity. The variables considered in the valuation process are experience, designation, and skills.
7) Adjusted Discounted Future Wages Method
This technique comes from Hermanson, in which the compensation for employees is tailored according to the value that the employee is bringing to the company. The discounted future earnings are adjusted using an efficiency factor to evaluate the organization’s human resources effectiveness. There are a few steps required in assessing the value of human resources using this method:
i) The first step is to calculate the wages and wages from all employees on all levels of the hierarchy for the next five years.
ii) Then, the value of salary and wage and other payments at the rates of return are determined.
iii) The average efficiency ratio for a specific period is calculated. The time length is typically over five years.
iv) Then, the present value of the services to come from the organization’s human capital is determined. It is accomplished by multiplying the discount amount (step II) by the organization’s efficient percentage (step number iii).
This ratio is determined with the help of the following formula:
Efficiency Ratio= Actual Average Earnings of the Organisations / Normal Earnings of all organizations.
If the Efficiency Ratio is 1: The average return rate is the same as the return rate for the entire economy. It implies that the HR value is equivalent to the industry’s value.
If the Efficiency Ratio exceeds 1: The company’s earnings exceed the normal income of the company. This implies that the amount of human resources is more significant than the average industrial production.
If the Efficiency Ratio is 1: The company’s return is less than its average income. If the value of the human resource is lower than the average industrial value,
8) Reward Valuation Method
The valuation method was developed in the work of Flamholtz and is regarded as an improved version of the capitalization of salary methods. The method considers that employees may leave the job before their retirement date or in the event of their death, and their position could change throughout their career. Based on this method, an employee’s current and actual value will be the worker’s expected weight.
The assumption behind the deal that is expected to be realizable is that there isn’t a connection between the total cost that an employee incurs to the value he brings to the company at a particular time frame. A person’s value as an employee’s work is determined by the value of the services provided in the future during his time in the company.
Non-Monetary Measurement Methods
You can’t measure these characteristics of human resources in monetary terms. However, they impact the company financially. There methods are the Non-Monetary measurement methods that is also important part of the methods of human resource accounting:
1) Skills Inventory
A record of skills is a representation of skills. It is a way of classifying employees according to their capabilities. Employees’ behavior and abilities are the most effective method to be assessed. The employee’s qualifications evaluate the abilities, training they have received, experience, and extra abilities. Based on their abilities, a decision is made as to how long they are most effective.
2) Performance Evaluation Methods
You can assess another method through human resources based on the level of performance not in terms of money. Two methods through which evaluation of performance are the following:
i) Rating: In this system, specific scales judge an employee’s performance. Ratings are awarded to employees based on the level of intelligence they have, their professional expertise, their interpersonal skills, their ability to judge the situation, etc.
ii) Ranking: People are rated by some or all aspects of this system. Rankings are thought of as a different type of rating. For instance, if an appraiser is asked to assess the workers’ performance according to their leadership skills, in this case, it is possible to rank them.
Methods that can use to determine sorting are:
A) Simple Ranking: This is the most straightforward method in which an evaluator evaluates an employee according to specific criteria and ranks according to their higher to lower. In the instance of punctuality, the most punctual employee gets the top position, and the one who is late most often is awarded a low rank.
B) Alternative Ranking: In this ranking method, one person with the highest score and the one with the lowest are chosen. The same procedure is used for the rest of the people. This makes the process of ranking easy and solid.
C) Paired Comparative: With this method, each employee is evaluated against the other employees before the ranking is made. This way, the most effective one will easily be distinguished from the best ones.
3) Potential Assessment
Assessment of potential, just as its name suggests, is the assessment of the possibility of an organization’s human resources to meet future needs. The primary method employed to evaluate potential is the approach based on traits. This method focuses on identifying the qualities that workers possess that are necessary for the job and determines the level of their presence among the employees. The development of an individual’s growth depends on his potential; therefore, assessing potential is crucial in determining the worth of human capital, not just monetarily.
4) Attitude Measurement
A person’s attitude is a reflection of the persona of person. Companies that use attitude measurement methods can quickly discern the opinions of their employees, such as whether employees are happy with their work, whether or not they’re satisfied with their work conditions, whether they would like an increase in their wages or are they happy with the company overall, etc.
These are a few questions that can be quickly answered by analyzing employees’ attitudes. Through the analysis of attitudes, management is also able to gather data on the attitudes of employees under their supervision. One of the most common methods to determine an employee’s perspective is the questionnaire method, where various questions can be asked, and the employee can respond based on the choices provided. For instance,
i) Excellent (D)
ii) Good (B)
iii) Average (C)
iv) Below the Average (A)
5) Subjective Expected Utility
The concept of subjective expected utility is comprised of two additional ideas the notions of subjectivity and utility. Utility refers to the worth of any resource or the value of the help to the person who uses it. Subjectivity refers to one’s perspective about the likelihood of a situation. There are a variety of psychophysical techniques using which the utility and subjective probabilities can be determined. One of these methods is pairing comparison or ranking techniques and magnitude estimation.
The magnitude estimation technique involves allocating numbers to indicate the magnitude of a property. If the property is assigned several zeros, the property’s value is zero. However, when the given number is high, it indicates the property has a high value.