DHRM301 Unit-04

DHRM301: Manpower Planning & Sourcing Manipal University Jaipur (MUJ)
MASTER OF BUSINESS ADMINISTRATION

SEMESTER 3
DHRM301
MANPOWER PLANNING &
SOURCING
Unit 4: Human Resource Accounting 1

Unit 4
Human Resource Accounting
Table of Contents
SL Fig No / Table SAQ /

Topic Page No
No / Graph Activity
1 Introduction - -
4-5
1.1 - -
Objectives
Definition of Human Resource Accounting - -
2 6
(HRA)
3 Need, Significance, Objectives for Human - 1

resource accounting
3.1 Need for HRA - -
7-8
- -
3.2 Significance of HRA
- -
3.3 Objectives of HRA
4 Advantages of HRA - 2 9 - 10
5 Methods of HRA 1, 2 3I
5.1 Cost Approach - -
Human Resource Value Accounting - -

5.2
(HRVA) 11 - 19
- -
5.3 Monetary Methods
5.4 Non-Monetary Methods - -
- -
5.5 Measurements of Group Value
6 - - 20
Objections to Human resource Accounting
7 - - 21 - 22
Controlling Manpower Costs
8 True Costs of Planning and Recruitment - 4
8.1 True Costs of Recruitment - -

23 - 24
True Costs of HR operations - -
8.2
- -
8.3 True Costs of HR operations per

employee
9 Human Resource Accounting in India - II 25
10 - - 26
Summary
11 - - 26
Glossary
12 - - 27
Terminal Questions
13 - - 27 - 28
Answers
14 - - 29
Case Study

1. INTRODUCTION
The fundamental aim of human resource accounting is to assist management in planning and
controlling human resources in an effective way.
In the previous units we learnt about manpower forecasting and planning. In this unit we
shall discuss measuring the potential value of human resources and their contribution to the
organization.
We have seen a global shift from manufacturing to service-based economies in the past few
decades. In service-based economies, competencies of the employees are more significant.
The ability to provide a high-quality service, effective productivity and knowledge
management processes require the involvement and commitment of competent employees
at all levels in an organization. Human resource accounting is a strategic tool available to the
management that is used to estimate the cost and value of its collective workforce. The
primary goals of human resource accounting is to estimate the cost of each employee, the
value of the total investment in human assets and most importantly, the returns from human
resource capital investments. Thus, human resource accounting helps the organization in
knowing the ‘expected realizable value’ of its employees.
In services like retailing, academic institutions, consulting firms etc., the effectiveness of the
organization relies on the skills of its employees and the services they render. Therefore, the
prosperity of the business is directly proportional to the quality and management of Human
Resource. This is also true for other industries as all businesses need people to carry out
their work effectively.
Human Resource is a vital component of the company assets and is called – ‘Human Capital’.
To arrive at a tangible worth or value of Human Capital, some methods of measuring the
worth or value of human resources and related processes viz. hiring, training etc. have been
developed. These methods or processes of measuring or quantifying human resources are
called Human Resource Accounting.

1.1 Objectives:
After studying this unit, you will be able to:
❖ Discuss the concept of human resource accounting.
❖ Describe the advantages of human resource accounting
❖ List the methods of human resource accounting
❖ State true costs of planning and recruitment
❖ Explain the strengths and weakness of human resource accounting

2. DEFINITION OF HUMAN RESOURCE ACCOUNTING (HRA)
According to, The American Accounting Association’s committee (1973), human resource
accounting is “the process of identifying and measuring data about human resources and
communicating this information to interested parties”. Apart from calculating the costs and
investments in processes like recruitment, hiring, placement and training, HRA also
quantifies the value of employees in an organization.
According to Eric Flamholtz (1971) HRA is defined as “the measurement and reporting of
the cost and value of people in organizational resources”. Stephen Knauf (1983) has defined
HRA as "the measurement and quantification of human organizational inputs such as
recruiting, training, experience and commitment."
HRA can be defined as the process of identifying, recording, measuring human resources and
communicating related financial information associated with the human resource to the
interested users. Thus, HRA not only involves measurement of all the costs / investments
associated with the recruitment, placement, training and development of employees, but
also the quantification of the economic value of the people in an organization.
Featuring HRA related information is not a statutory requirement as per the Companies Act
(1956). The Institute of Chartered Accountants of India has not defined any standard or
measurement to report HRA. This does not make HRA a superficial analysis. There are a few
organizations like BHEL and SAIL which understand the importance of HRA and emphasize
furnishing related information in their annual reports.

3. NEED, SIGNIFICANCE, OBJECTIVES FOR HUMAN RESOURCE

ACCOUNTING
The need for Human Resource accounting comes from a simple belief that anything that
needs to be improved needs to be measured first.
Once organizations realized the value of Human Resource and its contribution to the
effectiveness of the business, they felt the need of sustaining and increasing this value. In
order to identify whether or not they are moving in this direction, it was imperative to
measure the value of people in the organization.
To measure this a few methods were developed and employed. These methods or processes
form Human Resource Accounting.
3.2 Significance of HRA
In anorganization, management takes decisions on various business aspects. These decisions

have both long term and short-term implications. Human Resource Accounting helps the
management in taking well informed decisions for the betterment of the organization.
In the absence of HRA there could be decisions which are seemingly profitable in the short
term but may have adverse effects in the long run. For instance, an organization hiked the
sales incentives to spruce up sales for a particular month. The desired targets were achieved
for that month. However, in the next few months the performance deteriorated drastically
as the organization could not offer the same hiked incentives due to pressures on the bottom
line.
HRA provides vital information to the management and assists in effective human resource
management. It also adds value to critical HR processes – Hiring, Training, Developing,
Retaining, Rewarding etc.
3.3 Objectives of HRA
Human resource accounting helps the management in various ways. can It supports
managerial decisions involving human resource allocation, projection and scheduling in the
organization.

The purpose of human resource accounting is to facilitate the managers in planning,

supervising and controlling human resources in the most effective manner.
The objectives of Human Resource Accounting are:

• To provide cost/value information of Human Resource and associated processes to the
management and assist decision making.
• Serve as a basis for decisions concerning the human resources of the organization.
• Provide methods and standards for evaluating the worth of people to the organization
effectively.
• Enable effective management and monitoring of resources
• To report progress or regress of human assets
• Form the base for developing management principles by reporting financial outcomes
of decisions taken
According to Likert (1971), HRA serves the following purposes in an organization:
• It furnishes cost/value information for making management decisions about acquiring,
allocating, developing, and maintaining human resources in order to attain cost-
effectiveness.
• It allows management personnel to monitor effectively the use of human resources.
• It provides a sound and effective basis of human asset control, that is, whether the asset
is appreciated, depleted or conserved.
• It helps in the development of management principles by classifying the financial
consequences of various practices.
Self-Assessment Questions - 1
1. The purpose of human resource accounting is to facilitate the managers

in_________________ ,_____________________ and_______________ human resources in the most
effective manner.
2. Human Resource Accounting helps the management take well informed
3. The objective of HR accounting is to enable___________ and monitoring of resources

4. ADVANTAGES OF HRA
Apart from reporting the value of HR and HR processes, HRA also implies whether the
processes are genuinely necessary and are adding value. It also highlights reducible and
unnecessary costs.
HRA not only helps in internal decision making but also influences external decisions. It helps
investors and stakeholders to make investment decisions. For instance, the cost of training
and development will feature under ‘expenditures’ in the balance sheet; whereas the returns
on investment (ROI) of training, will not feature in the balance sheet. Thus, it does not
provide a complete picture to the investor. So, if the organization is able to include such
information in the annual/quarterly report, it will add a lot of value to performance and
depict a true picture of the potential.
It gives the promoters and investors a measure of efforts being made to enhance the
organizational capability and a sense futuristic approach.
HRA can also be deployed to gain a competitive edge over other organizations. L Let us
consider company A and company B competing with each other in the market. Currently
company A is doing better than company B as it has a product advantage. However, company
B has revamped its research to close this product advantage gap, also company B has
instituted HRA in the organization. In the long term, company B is certain to be more
successful as it has closed the technical gaps and also concentrated on valuing human
resource competence. This enables it to stay ahead of others as it is more preventive of any
loss or inefficiency on account of human resources.
HRA highlights the organization’s efforts towards the development of its employees and
measures the performance of Human Resource Development Function. In conclusion, the
major benefits of HR accounting are:
• It checks the corporate plan of the organization. The corporate plan aiming for
expansion, diversification, changes in technological growth etc. has to be worked out
with the availability of human resources for such placements or key positions. If such
manpower is not likely to be available, HR accounting suggests modification of the
entire corporate plan.

• It offsets uncertainty and change, as it enables the organization to have the right person
for the right job at the right time and place.
• It provides scope for advancement and development of employees by effective training
and development.
• It helps individual employees to aspire for promotion and better benefits.
• It aims to see that the human involvement in the organization is not wasted and brings
high returns to the organization.
• It helps to take steps to improve employee contribution in the form of increased
productivity.
• It provides different methods of testing and interview techniques to be adopted in the
selection process based on the level of skills, qualifications and experience of future
human resources.
It can foresee the change in value, aptitude and attitude of human resources and
accordingly change the techniques of interpersonal management
4. ________________ helps investors and stakeholders to make investment decisions.

5. HRA highlights the organization’s efforts towards the development of its
employees and measures the _____________ of Human Resource Development
Function.
6. The adoption of the system of HRA discloses the___________of human resources.

5. METHODS OF HRA
The two most common methods of HRA are:
• Cost based Approach

• Economic Value Approach
A. A Cost based Approach is based on the cost incurred by the organization on account
of an employee.
‘Cost’ is a sacrifice incurred to obtain some anticipated benefit or service. All costs have
two portions, viz., the expense and the asset portions. The expense portion is that which
provides benefits during the current accounting period (usually the current financial
year), whereas the asset portion is that which is expected to give rise to benefits in the
future.
This approach is also called human resource cost accounting. It operates like a
traditional financial accounting system. It assumes that the value can be estimated
properly through the historical investment or cost incurred. There are four important
cost concepts available to measure the cost of human assets (i) Original or historical
cost (ii) replacement cost
(iii) opportunity cost and
(iv) Standard cost.
i) Historical cost approach: This approach was developed by Lee Brummet, Eric
Flamholtz and William C. Pyle. The historical cost of human resources is the sacrifice
that was made to acquire and develop the resource. These include the costs of
recruiting, selection, hiring, placement, orientation, and on the job training. While some
of the costs like salaries, for are direct costs, other costs like the time spent by the
supervisors during induction and training, are indirect costs.
According to this approach, the cost incurred for recruiting, training and developing the
employees should be capitalized and then amortized over the estimated useful life of
human resources. This approach is similar to accounting treatment of any physical
asset in which the cost of an expired portion of an asset is written off from the assets as
an expense. Unlike the physical asset, the acquisition cost of human assets is incurred
gradually over a period of time and then aggregated to identify the historical cost of the

asset. Then a specific proportion of the historical cost of the human asset is written off
every year throughout the life of that person in the organization as an expense against
the income earned during that year.
Let us assume that the useful life of the employee in the organization is 10 years. If the
capitalized value of the employee is Rs. 700,000 and his estimated life in the
organization is 10 years, the annual amortization would be 700000/10=70,000 per
year.
ii) Replacement cost approach: The replacement cost of human resources is the cost
incurred if present employees are to be replaced. For instance, if an employee were to
leave today, several costs of recruiting, selection, hiring, placement, orientation, and on
–the- job training would have to be incurred in order to replace him. Such costs have
two dimensions- positional replacement costs and personal replacement costs.
The aim of the approach is to suggest a more realistic accounting treatment to value of
the cost of an asset. This approach considers the aggregate cost of recruiting, training
and developing people as suitable replacements for the existing levels of expertise and
experience available with the organization. The replacement approach can be classified
into personal and positional replacement.
Personal replacement: The costs incurred to replace the services rendered by an

employee only to a particular position. When the cost of replacing an incumbent in a
specific position of the organization is considered, it is known as personnel
replacement.
Positional replacement: The cost incurred to replace all the services expected to be
rendered by the employee in the various positions that he might have occupied during
his work life in the organization. In the case of position replacement approach, only the
exact skills and knowledge required for the job performance is considered.
iii) Opportunity cost approach: A calculation of what the returns would have been if the
money spent on HR was spent on something else. . However, this method is seen to be
not as objective as desired. Hence its use is restricted to internal reporting and not
external reporting. In this approach an opportunity cost exists for all human resources
that are in short supply.

B. Economic Value approach: The value of an object, in economic terms, is the present
value of the services that it is expected to render in future. Similarly, the economic value
of human resources is the present worth of the services that they are likely to render in
future.
5.1 Human Resource Value Accounting (HRVA): The economic value of Human
Resource is the financial benefits they offer through their services at present and those
expected in future. This can be considered for an individual, a group or the organization.
There are monetary and non- monetary methods of calculating this value.
5.2 Monetary Methods

I) Flamholtz’s Model of Individual Value
According to Flamholtz the value of an individual is the worth of services offered by the
individual in his current role/profile and the services he would render on account of
the role/profile he may hold in future due to a transfer or a promotion.
This value is difficult to derive as it has two dimensions. The first is Expected
Conditional Value which is the amount that the organization could potentially realize
from the services of an individual during his/her productive service life in the
organization. It is composed of three factors:
I. Productivity or performance (set of services that an individual is expected to
provide in his/her present position);
II. Transferability (set of services that he/she is expected to provide if and when
he/she is in different positions at the same level);
III. Promotability (set of services that are expected when the individual is in higher
level positions).
These three factors depend, to a great extent, on individual determinants like activation
level of the individual (his motivation and energy level) and organizational
determinants like opportunity to use these skills or roles and the reward system.
The second dimension is Expected Realizable Value which is derived from expected
conditional value and the probability that the employee will be associated with the
organization till his retirement or till the time he is productive. Employees are free to

switch over from one organization to the other; so, it is important to determine the
probability of their turnover.
The individual and organizational factors discussed above lead to job satisfaction. Job
satisfaction is inversely proportional to employee turnover and therefore it is directly
proportional to expected realizable value. So the greater the job satisfaction, higher the
expected realizable value.
II) Flamholtz’s Stochastic Rewards Valuation Model

The movement or progress of people through organizational ‘states or roles is called
stochastic process. The Stochastic Rewards Model is a direct way of measuring a
person’s expected conditional value and expected realizable value. It is based on the
assumption that an individual generates value as he occupies and moves along
organizational roles, and renders service to the organization. It presupposes that a
person will move from one state in the organization, to another, during a specified
period of time.
However, there is a presumption that the employee will move from one role/state to
another, in a specified period of time. ‘Exit’ is also considered to be a state in this model.
There are some prerequisites to this model:
• A clear differentiating structure of roles/states/positions an employee would
move/progress during this career with the organization
• The value of these positions to the organization
• An employees’ expected tenure with the organization
• Probability of movement from one role to another at specified durations
III) The Lev and Schwartz Model

The Lev and Schwartz model is commonly used by Indian companies and is based on
calculating the value by considering an employee’s current and future earnings. The
basic theme of Lev, Schwartz model is to compute the present value of the future direct
and indirect payments to their employees as a measure of their human resource value.
While doing so, the common assumptions set by the Indian companies are the pattern
of employee compensation, normal career growth, and weightage for efficiency.

This approach assumes that an employee would stay for ‘t’ years with the company and
‘Ev’ is the value he can earn based on his current and future earnings. It also considers
a discount factor ‘r’ to adjust the difference between the value Io current and future
earnings.
(tf)
Ev =
(1+𝑟)tr
Ev = value an individual can earn based on current and future earnings I(t) = the
individual's annual earnings up to ‘t’ years or retirement age
t = assumption that an employee would stay for ‘t’ years
r = discount factor ‘r’ to adjust the difference between the value of current and future
earnings
E.g., NTPC’s HR Value, (1994-95) as per the annual report, Discount factor (r) = 0.12
No. of Employees Per Capita(Rs.
Category Total Value (Cr)
Lakhs)
Executives 6841 17.76 1215
Supervisors 3010 15.11 455
Workmen 12445 13.71 1705
Fig. 4.1: NTPC’s HR value as per the annual report (1994-95)
IV) Hekimian and Jones Competitive Bidding Model
In this method managers bid for existing human resources and determine the value of
the employee. The highest ‘bid’ is the value of that resource. The highest bidder ‘wins’
the resource. There are no criteria on which the bids are based. Rather, the managers
rely only on their judgement. This model is based on the managers’ evaluation of the
employees.
5.3 Non-monetary methods

Non-Monetary methods rely on predicting the value of skills and capabilities of the
employees in terms of rankings, ratings or indices. These methods can be a substitute to the
monetary methods and also have predictive value. They are based on simple skills and
capability inventory, Psychometric tests, Performance Evaluation, 360 degrees Feedback etc.

5.4 Measurements of group value

The Likert and Bowers Model
The non-monetary methods may refer to a simple inventory of skills and capabilities of
people within an organization or to the application of some behavioral measurement
technique to assess the benefits gained from the Human resource of an organization.
1. The skills or capability inventory is a simple listing of the education, knowledge,
experience and skills of the firm’s human resources.
2. Performance evaluation measures used in HRA include ratings, and rankings.
3. Ratings reflect a person’s performance in relation to a set of scales. They are scores
assigned to characteristics possessed by the individual. These characteristics include
skills, judgment, knowledge, interpersonal skills, intelligence etc.
4. Ranking is an ordinal form of rating in which the superiors rank their subordinates on
one or more dimensions, mentioned above.
5. Assessment of potential determines a person’s suitability for promotion and
development. It usually employs a trait approach in which the traits essential for a
position are identified. The extent to which the person possesses these traits is then
assessed.
6. Attitude measurements are used to assess employees’ attitudes towards their job, pay,
working conditions, etc., in order to determine their job satisfaction and dissatisfaction.
This model proposes use of causal, intervening and end-result variables to determine the
value of a group to the organization.
• Causal variables are the ones which can be managed and controlled by the
organization (Independent Variable). Examples: Managerial behavior, organization
structure .etc.
• Intervening variables reflect the competencies, capabilities of an organization and
involve group processes (Independent Variable). Examples: Organizational culture,
environment, processes, leadership, employee satisfaction.
• End-result variables reflect the achievements of the organization, total productivity,
the efficiency and productivity of the organization (Dependent Variable). Examples:
Sales, cost

Scenario:
If the organization structure and the attitude of the mid management (casual variables) are
superlative or comparable to the best, then the first part of the battle is won.
If the processes, leadership are excellent and the organization culture is of meritocracy
(intervening variables) then the second part of the battle is won. These automatically build
the confidence that the organization will perform well on key performance metrics.
If the dependent variables such as end-results of sales, customer service are comparable with
the best in the industry, then the last and final part of the battle is won. Now determining the
value of the group has become relatively easy.
A Hypothetical Example is provided for your reference in Fig. 4.2
Scenario Casual Intervening End Results Valuation ofthe
VariableScore Variable Score Variable Score company
1 0.3 0.3 0.4 600 Crores

2 0.6 0.6 0.8 1200 Crores
3 0.9 0.9 1.2 1800 Crores
4 1.8 1.8 2.4 3600 Crores
Fig. 4.2: Hypothetical valuation of the company based on the variables
Brummet, Flamholtz, and Pyle’s Economic Value Model
This method is based on the principle that the current worth of the services an employee can
provide in future is equal to the resource’s value. Example: Mr. Ramesh works as a
Recruitment Manager. He is responsible for hiring 50-100 middle management and senior
management employees. His services are currently worth Rs.10 Lakhs per annum*. Let us
assume that Mr. Ramesh will continue to work in the same role for the next 5 years, and his
contribution in terms of services increases at 20% per annum.
Services Worth(INR
Year FY Increment
Lakhs)
0 2010-2011 10.00
1 2011-2012 12.00 20% over previous year

Total (Year 1 to 5) 91.21

Therefore, in the next 5 years, Mr. Ramesh will provide services worth Rs.91.21 lakhs.
* Please note this is not the salary of Mr. Ramesh, it’s only the value of his services.
This can be further extended to measure the value of a group. For example: the economic
value of the HR department in the organization can also be calculated using the above-
mentioned approach. HR departments’ economic value is equal to the current worth of the
future services the HR department can offer. If the current worth of the services that HR can
offer in the future is 100 crores, then that is the Economic Value of the HR group.
Hermanson’s Un-purchased Goodwill Model

Hermanson proposes that exceptional earnings indicate the value of human assets. Human
assets are not shown in the balance sheet. Example: A telecom company earns 25% more
profit than its competitors. That is a telecom company earned 8 crores profit and its
competitors earned 6 crores profit. This 25% additional or exceptional earnings indicate the
value of human assets which are not listed in the balance sheet. These human assets are not
owned by the company, but their existence in the company leads to the creation of this
exceptional earning. This is the un-purchased good will model. This model was intended to
be deployed for published balance sheets, but it is also used now to forecast future
performances.
Human organizational dimensions method

Based on the Likert-Bowers model of group’s value to an organization, discussed earlier.
This method is based on the relationship among causal, intervening and end-result variables.
The causal variables influence the intervening variables, which, in turn, determine the
organization’s end result variables. Hence changes in the key dimensions of organization can
be used as dependable indicators for forecasting future changes in productivity and financial
performance.
Methods for Valuation of Expense Centre Groups

Flamholtz proposes 3 methods for valuation of expenses Centre groups here:
Capitalization of Compensation
This method involves capitalizing a person’s compensation to determine his value to the
organization. Similarly, the value of the group will depend on the members comprising the
group. This method is not an ideal method as it ignores all non-monetary factors and

determinants. For example: All the employees in the HR department may be earning 70
Lakhs annually. This becomes the value of the group to the organization.
Replacement Cost Valuation

Replacement cost is defined as the cost that will have to be incurred on hiring, training,
developing, etc. of a new group to replace an existing group to obtain services equivalent to
those rendered by the existing group. This method is not ideal in the long run as it has
subjective estimates.
Original Cost Valuation

This method is similar to the replacement cost valuation except for it determines the value
by considering the actual cost that was incurred for hiring, training, development, etc. of the
group. This method can be used to estimate the cost of building an effective group. Even in
this method the factors like group dynamics and teamwork are ignored. Also, the fact that
you cannot replicate people is also ignored.
7. Certain other ways to classify cost are – Historical Cost, Opportunity

Cost, and ____________ Cost.
8. Opportunity cost method looks at what would have been the returns if
the cost incurred on HR was__________ somewhere else.
9. The economic value of Human Resource is the____________ benefits they offer
through their services at present and those expected in future.
10. According to Flamholtz the value of an individual is the__________________of
services offered by the individual in his current role/profile and the role/profile
he may hold in future on account of a transfer or a promotion.
11. In________________________ Model managers bid for existing human resources and
determine the value of the employee.
12. ________________ methods rely on predicting the value of skills and capabilities of
the employees in terms of rankings, ratings or indices.
13. Economic Value approach is based on the economic value of the
employees and their________________ .
14. Casual Variables include managerial behavior and________________ .

Activity 1
Visit the portal IT People India and Read the article “The need for Human Resource
Accounting”, by Punita jasrotia.
http://www.itpeopleindia.com/20021216/cover.shtml
6. OBJECTIONS TO HUMAN RESOURCE ACCOUNTING

Though the application of Human Resource Accounting in the HR sector has shown a positive
trend, there are objections to HRA and it needs further work.
• Most models are predictive

• Most models and evaluations are based on assumptions
• Value determined are not accurate
• Values or methods of determination are often subjective
• Conversion of non-monetary factors into commercial value is difficult
• In some methods, important factors like human behavior are ignored
• Difficult to replicate the models over a period of time
• One cannot predict employee tenure in the organization
• External factors like market conditions and related factors are ignored
• Sometimes application of HRA is complex

7. CONTROLLING MANPOWER COSTS

Quite a few methods of Human Resource Accounting determine the monetary value of HR by
considering cost of recruitment, hiring, training, placement, orientation, development,
compensation, replacement etc. All these costs contribute to the costs of manpower. HRA
links these costs directly to the output in terms of earnings.
HRA gives the management a perspective to evaluate their past HR decisions and strategy.
The management can compare the expenses made on HR related process and the benefits
they derive from these expenses. This helps them conclude that the expenses were worth
making and reasonable. Any alterations required in the cost structure or the processes can
be determined.
HRA assists in forecasting costs of manpower and associated activities for future business
plans. It may also highlight unnecessary cost and reduce cost. HRA suggests what portion of
the total spend should be allocated to HR and its development. It also measures the return
on investment by Human Resource Development. Overall HRA can be an important tool in
controlling manpower cost.
Some tips on controlling manpower costs are:

• Freeze hiring i during certain months of the year
• Criteria for approval of manpower to be made stringent
• Encourage filling in positions from within
• Develop employee competencies by training andother interventions
• Improve efficiency and effectiveness of work of employees to minimize hiring
additional employees
• Retain top performing employees Ensure performance appraisals are fair
• Ensure review of performance is done monthly and areas of improvement are
highlighted, no unfair expectations in terms of performance rating should be allowed
to set in
• Encourage automation of business processes
• Encourage simplification of complex processes (eliminate non value adding process
steps or processes)

• Follow industry best practices

• Pay overtime to employees or incentivize them instead of hiring temporary staff or
additional employees.
• Hire management trainees
• Encourage management trainees to work for experience on a stipend rather than a full
salary.
• Use low-cost solutions for hiring and training - recruitment portals, e- learning etc.
• Deploy full HR portal, for employees to get all support, they need online.

8. TRUE COSTS OF PLANNING AND RECRUITMENT

All organizations have specific HR strategies which are aligned to their goals. To employ
these strategies HR needs to form various processes, programs and systems. This is called
planning. For example: compensation study of comparable organizations in the industry may
be undertaken to decide the salary levels or increments to be offered. This study may be
outsourced and there is a cost for this study and it is part of the planning activities. Hence
this cost is the direct planning cost. The direct cost will be the actual amount spent on
planning. IIndirect cost will be the cost of the time that supervisors and HR managers HR
spend on this activity.
True Cost of Planning = Direct Cost of Planning + Indirect Cost of Planning

This involves planning all HR activities like recruitment, hiring, training, development,
performance management, compensation, statutory processes, separation, etc.
8.1 True costs of recruitment

Once the organization establishes the number of employees it needs to hire in various
functions, it looks at different sources to get the right candidates. These sources could be
consultants, job portals, referrals, advertisements, campus, internal job posting etc. The cost
involved in all activities of recruiting human resources is called cost of recruitment. This may
also attract future human resources.
The direct cost will be the actual amount spent on recruitment whereas the indirect cost will
be the cost of time supervisors, managers spend on this activity.
Direct cost cost of advertising, designing advertisements, registration fees for recruitment
portals, creating internal advertisements for encouraging referrals, internal job postings and
salaries of recruitment executives spending full time on recruitment.
Indirect cost cost of time of supervisors and managers.
True Cost of Recruitment = Direct Cost of Recruitment + Indirect Cost of Recruitment
8.2 True costs of Hr Operations

How do we calculate what the HR Operation Cost is for the Company?
HR Operation Cost = Sum of Direct costs of HR + Sum of Indirect costs of HR

Direct HR costs - salary, bonus, software/hardware purchase, training, licenses, stationery

etc.
Indirect HR costs - cost of payroll processing department called inter department cost,
seat/space cost occupied by HR employees.
8.3 True costs of HR operations per employee

How to calculate operation cost per employee?
Direct costs of HR + Sum of Indirect costs of HR
HR Operation Cost =
Total no. of employees in the organization
15. HRA assists in______________costs of manpower and associated activities for future
business plans.
16. Direct cost will be the actual amount spent on planning whereas indirect cost will
be the cost of the_____________ those supervisors and managers in HR spend on this
activity.
17. Direct HR costs include_______________, bonus, software/hardware purchase,
training, licenses, stationery etc.

9. HUMAN RESOURCE ACCOUNTING IN INDIA

Human Resources Accounting was introduced 1980s, however it gained importance in India
after it was adopted Neyveli Lignite Corporation Limited. In India there are organizations
like BHEL, SAIL, MMTC, SPIC, Hindustan
Zinc Ltd, ONGC, OIL, Associated Cement Companies Ltd, etc., which understand the
importance of Human Resource Accounting and so they publish related information in their
annual reports
However, it is mostly the manufacturing units and refineries which are currently employing
HRA on a larger scale. The service industry needs to take cognizance of this and understand
the importance of HRA. In fact, it is more important for the service industry as people form
a major portion of their resources and tools.
Activity 2
Visit this website and study about HRA. Write 2 key learning from the study in about 50 -100
words. http://rajaraop.wordpress.com/2010/05/15/human-resource-accounting-p-
rajarao-manuguru/

10. SUMMARY
Recently there has been considerable work and focus in the sphere of HRA. H. Efforts are
being made to quantify the worth of human , intellectual and relationship capital. There are
different methods being employed to derive this value.
HRA and its benefits are hugely dependent on availability of complete, accurate, timely and
relevant information. However, organizations where resources for making this available are
inadequate.
All organizations have specific HR strategies which are aligned to their goals. To employ
these strategies, HR needs to form various processes, programs and systems. This is called
Planning. It involves Planning of all HR activities like recruitment, hiring, training and
development, compensation etc.
11. GLOSSARY
Term Description
v Variables which can be managed and controlled by the

Causal
organization (Independent Variable). Examples: Managerial
variables
behavior, organizational structure.
v Variables that reflect the competencies and capabilities of an
Intervening organization and involve group processes(Independent Variable).
variables Examples: Organizational culture, environment, processes,
leadership, employee satisfaction.
True cost of The expenditure on recruitment,selection, hiring and training.
recruitment
cost of any activity measured in terms of the value of the next best
alternative forgone (that is not chosen). It is the sacrifice related to
Opportunity
the second-best choice available to someone, or group, who has
cost
picked among several mutually exclusive choices.

12. TERMINAL QUESTIONS

1. What is HRA and what is its significance?
2. How would you differentiate between monetary and non-monetary value/worth of
human resources?
3. What are the advantages of HRA in modern day business?
4. Describe the methods of controlling manpower costs.
5. List 2-3 objections to HRA.
6. Explain Likert and Bower Model of measurement of group value.
13. ANSWERS
Self-Assessment Questions
1. Planning, supervising and controlling

2. Betterment
3. Effective management
4. Human resource accounting
5. Performance
6. value
7. Replacement
8. Invested
9. Financial
10. Worth
11. Hekimian and Jones Competitive Bidding
12. Non-Monetary
13. Contribution
14. Organization Structure
15. Forecasting
16. Time
17. Salary

Terminal Questions
1. The process of identifying and measuring data about human resources and
communicating this information to interested parties”. Apart from calculating the costs
and investments in processes like recruitment, hiring, placement and training, HRA also
quantifies the value of employees in an organization. Human Resource Accounting
helps the management take well informed decisions for the betterment of the
organization. ( Refer 2, 3)
2. The value of an individual is the worth of services offered by the individual in his
current role/profile and the role/profile he may hold in future on account of a transfer
or a promotion. Non-Monetary methods rely on predicting the value of skills and
capabilities of the employees in terms of rankings, ratings or indices. (Refer 5)
3. HRA helps investors and stakeholders to make investment decisions
For instance the cost of training and development will feature under ‘expenditures’ in
the balance sheet; whereas the returns on investment (ROI) of training will not feature
in the balance sheet. (Refer 4)
4. True Cost of Planning = Direct Cost of Planning + Indirect Cost of Planning. This involves
planning all HR activities like recruitment, hiring, training, development, performance
management, compensation, statutory processes, separation, etc. (refer 8)
5. Most models are predictive, evaluations are based on assumptions, Value determined
are not accurate, Values or methods of determination are often subjective, Conversion
of non-monetary factors into commercial value is difficult. In some methods, important
factors like human behavior are ignored, Difficult to replicate the models over a period
of time. One cannot predict employee tenure in the organization. External factors like
market conditions and related factors are ignored. Sometimes application of HRA is
complex. (Refer 6)
6. The Likert and Bowers Model proposes use of casual, intervening and end-result
variables to determine the value of a group to the organization. Two variables are
Causal and intervening variable. (Refer 5)

14. CASE STUDY – LAKSHMAN’S DILEMMA

Mr. Lakshman took over his family business from his father. The business employed 15
supervisors and 50 workmen who worked with this organization for a long time and felt they
were a part of it. Mr. Lakshman was an ambitious young man and desired to grow the
business. He soon looked at new opportunities and modernized the business to capitalize on
the new avenues. His tenured staff supported him all the way. They ensured that the new
manpower recruited came up to speed in double quick time. The new manpower was trained
as per the business needs. Especially the supervisors drove Mr. Lakshman’s plan to
perfection.
Business grew three folds after Mr. Lakshman took over. He wanted to extend the operations
by adding another expertise in the same domain. This required 5 supervisors and 15
workmen. Since Mr. Lakshman did not want to disturb the existing set-up, H he decided to
hire new supervisors and workmen.
The new set-up required a lot of input and monitoring from Mr. Lakshman . This took away
a major portion of his productive time and restricted his ambitious plans. In a few months,
the new set-up was still not earning profits and the old set-up remained where it was.
Case Study Questions
1. How would you assess the human worth of Mr. Lakshman’s old set up?
2. What according to you are the reasons for the current crisis?
3. Do you think Mr. Lakshman made a few incorrect HR choices while setting up the new
business? If yes, what are they?
Hint:
1. Flamholtz’s Model of Individual Value and Brummet, Flamholtz, and Pyle’s Economic
Value Model.
2. Mr. Lakshman was not strategic in his approach. He did not leverage his internal
expertise. He was more of a manager than a leader.
3. Yes, not leveraging his internal expertise and promoting talent and making leaders out
of them.
Recommended Reading
• Gupta, R.K. (1997). Human Resource Accounting. New Delhi: Anmol Publications.

References:
Books
• Gupta, R.K. (1997). Human Resource Accounting. New Delhi: Anmol Publications.
• Malik, R.K. Human Resource Accounting and Decision Making. New Delhi: Anmol
Publications
• Rao, S.P. (2010). Personnel and Human Resource Management. Mumbai: Himalaya
Publishing House
• Tripathi, P.C. (2009). Human Resource Development. New Delhi: Sultan Chand and Sons
• Mahapatro, B.B. (2010). Human Resource Management. New Delhi: New Age
International Publishers
• Aggarwala, D.V., (2008) Manpower: Planning, Selection, Training and Development.
India: Deep and Deep.
• Pravin Durai, Human Resource Management, Pearson Publication, New Delhi .2010.
Details of these books are available at www.sapnaonline.com and www.infibeam.com.
E-References:
• http://www.sveiby.com/articles/intangible_assets.html (Retrieved 21 May 2010)
• http://hr-management.hr.toolbox.com/topics/management- budgeting/aligning-hr-
budget/ (Retrieved 21 May 2010)

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DHRM301: Manpower Planning & Sourcing Manipal University Jaipur (MUJ)

MASTER OF BUSINESS ADMINISTRATION

Unit 4: Human Resource Accounting 1

SL Fig No / Table SAQ /

3 Need, Significance, Objectives for Human - 1

5.1 Cost Approach - -

Human Resource Value Accounting - -

8.1 True Costs of Recruitment - -

Unit 4: Human Resource Accounting 2

9 Human Resource Accounting in India - II 25

Unit 4: Human Resource Accounting 3

Unit 4: Human Resource Accounting 4

Unit 4: Human Resource Accounting 5

2. DEFINITION OF HUMAN RESOURCE ACCOUNTING (HRA)

Unit 4: Human Resource Accounting 6

3. NEED, SIGNIFICANCE, OBJECTIVES FOR HUMAN RESOURCE

3.2 Significance of HRA

In anorganization, management takes decisions on various business aspects. These decisions

3.3 Objectives of HRA

Unit 4: Human Resource Accounting 7

The purpose of human resource accounting is to facilitate the managers in planning,

The objectives of Human Resource Accounting are:

1. The purpose of human resource accounting is to facilitate the managers

Unit 4: Human Resource Accounting 8

Unit 4: Human Resource Accounting 9

4. ________________ helps investors and stakeholders to make investment decisions.

Unit 4: Human Resource Accounting 10

• Cost based Approach

Unit 4: Human Resource Accounting 11

Personal replacement: The costs incurred to replace the services rendered by an

Unit 4: Human Resource Accounting 12

5.2 Monetary Methods

Unit 4: Human Resource Accounting 13

II) Flamholtz’s Stochastic Rewards Valuation Model

III) The Lev and Schwartz Model

Unit 4: Human Resource Accounting 14

5.3 Non-monetary methods

Unit 4: Human Resource Accounting 15

5.4 Measurements of group value

Unit 4: Human Resource Accounting 16

1 0.3 0.3 0.4 600 Crores

4 2014-2015 21.33 20% over previous year

Unit 4: Human Resource Accounting 17

Hermanson’s Un-purchased Goodwill Model

Human organizational dimensions method

Methods for Valuation of Expense Centre Groups

Unit 4: Human Resource Accounting 18

Replacement Cost Valuation

Original Cost Valuation

7. Certain other ways to classify cost are – Historical Cost, Opportunity

Unit 4: Human Resource Accounting 19

6. OBJECTIONS TO HUMAN RESOURCE ACCOUNTING

• Most models are predictive

Unit 4: Human Resource Accounting 20

7. CONTROLLING MANPOWER COSTS

Some tips on controlling manpower costs are:

Unit 4: Human Resource Accounting 21

• Follow industry best practices

Unit 4: Human Resource Accounting 22

8. TRUE COSTS OF PLANNING AND RECRUITMENT

True Cost of Planning = Direct Cost of Planning + Indirect Cost of Planning

8.1 True costs of recruitment

Indirect cost cost of time of supervisors and managers.