Costing Human Resources Chapter 1 The Costs and Benefits Of Human Resources In the past. . . “HR professionals have been getting by focusing on the day-to-day. They need to develop a broader and farther- reaching vision and understand where their organization is headed and how they can help steer the company in that direction.” Human Resource Accounting HRA procedures are the first step in developing sophisticated measurement and accounting procedures to enable to company to report accurate estimates of the worth of the organization’s human assets. Historical-cost approach to employee valuation looks at costs actually incurred. Most appropriate for external reporting used to inform interested parties of the financial position & results of a company’s operations. More on historical-cost approach Based on false assumption that the dollar is stable. Because the assets are not salable there is no independent check of valuation (subjectivity). Measures only costs to the organization; it ignores completely any measure of the value of the employee to the organization. Replacement Cost Measures the cost of replacing the employee rather than the historical cost of an employee. Most appropriate in the context of dismissal and replacement staff. Include: recruitment, selection, compensation, and training costs May lead to upwardly biased estimates because an inefficient firm may incur greater costs. How often do company’s make decisions regarding dismissing & replacing staff? Present Value of Future Earnings Organization establishes what an employee’s future contribution is worth to it today Can be measured by its cost or by the wages the organization will pay the employee Measure is limited because it assigns value to the average rather than to a specific group or individual. Details. . . Uses statistics such as consensus income returns and mortality tables Since there value is assigned to the average, there is no benefit to monitoring an individual firm’s investment in employee development since the investment would have little or no impact on the present value of future earnings. Endless Search The search continues for a single, limited- criterion measure for HRA but it is unrealistic to expect that such a measure will be developed. We judge the value of athletes by measuring how much a particular team is willing to pay him. Costing Employee Behaviors “The criterion should measure the contribution of the individual to the overall efficiency of the organization…It centers on the quantity, quality, and cost of the finished product. Such factors as skill are latent-their effect is realized in the end product.” Costing Emp Behaviors The contribution each Outlay costs (ex. Materials employee makes it not used in training new employees) v. time costs (ex related to the size of a supervisors’ time spent firm’s investment in that orienting new employees) employee, but it is directly related to how Fixed costs (salaries) each person works and Variable costs (sales what is produced. commissions) Opportunity costs (forgone) Intellectual Capital Traditional financial statements are less illuminating with respect to the assets that create wealth than they were in the past. Intangible assets such as brand names, intellectual capital, patents, copyrights, and expenditures for research and development now generate an increasing amount of wealth for firms. “Soft” assets – not recognized in financial statements Put People on the Balance Sheet “Every country, every company, and every individual depends increasingly on knowledge – patents, processes, skills, technologies, information about customers and suppliers, and experience.” This has brought up a new way of strategic thinking about “how to put people on the balance sheet.” Valuing Intellectual Capital “A way of describing the otherwise intangible dimensions of the operation, and not as an attempt to create added value in the likes of the emperor’s new clothes.” Found in one or more of three places: people, structures, and customers. Define Yourself Human capital: knowledge, skill, and capability of individual employees to provide solutions to problems that customers think are important – “outside-in approach” Structural capital: sharing, transporting, and enabling human capital Customer capital: value of an organization’s relationships with the people with whom it does business, including suppliers Measuring Intellectual Capital 1. Keep it simple 2. Measure what is 3. strategically important 4. Measure activities that produce intellectual wealth Measurement of intellectual capital can help managers and investors by providing a more accurate estimate of the true value of the company than would a single accounting of its physical holdings.
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