Page 86 - DCOM409_CONTEMPORARY_ACCOUNTING

Unit 7: Approaches of HRA

In terms of salary, department X can offer a salary of ` 1.50 lakhs (` 10 lakhs × 15%) while Notes
department Y up to `1.75 lakhs (` 11.67 × 15%). Department Y, thus, also offer a high salary.
Department Y will have the technocrats on account of a higher bid and it will include ` 11.67
lakhs as its investment in human resources.

Merits of Opportunity Cost Approach

According to the authors of this approach, a bidding process, such as this, is a promising approach
towards (a) more optimal allocation of personnel and (b) a quantitative base for planning,
evaluating and developing human assets of the firm.

Limitations of Opportunity Cost Approach

This approach has several limitations:
It has narrowed down the concept of opportunity cost by restricting it to the best use of the
employee within the same organisation.
It has specifically precluded from its purview those employees who are not scarce or, are
not being bid by other department. This is likely to result in lowering of morale and
productivity of the employees, who are not covered by the competitive bidding process.
The total valuation of human resources based on this method may be misleading and
inaccurate. This is because a person may be an expert in a particular area and therefore
may be useful for one department, but useless for another department Thus, he may be a
valuable person for the department he is working and command a high value. However,
he may have a lower price in the bid by the other department where his services are not at
all required.

7.1.4 Standard Cost Approach

David Watson has suggested this approach. According to this approach, standard costs of
recruiting, hiring, training and developing per grade of employees are determined year after
year. The standard cost so arrived at for all human beings employed in the organisation is the
value of human resources for accounting purposes.

The approach is easy to explain and can work as a suitable basis for control purposes through the
technique of variance analysis. However, determination of the standard cost for each grade of
employee is a ticklish process.

7.1.5 Present Value Approach

According to this approach, the value of human resources of an organisation is determined
according to their present value to the organisation. For determination of the present value, a
number of valuation models have been developed. Some of the important models are as follows:
1. Present Value of Future Earnings Model: This model has been developed by Lev and
Schwartz (1971). According to this model, the value of human resources is ascertained as
follows:
(a) All employees are classified in specific groups according to their age and skill.

(b) Average annual earnings are determined for various ranges of age.
(c) The total earnings that each group will receive up to retirement age are calculated.

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