Investment in Human Resources

There is much debate as to whether the human resources of an organization can be considered as an asset and treated accordingly in the accounting system. There are two schools of thought. One says that human resource is an asset and the other does not agree with this. Now let us see what is an asset? Asset is anything which is owned by the entity to derive service in future and should have legally enforceable claim.

Investment in Human Resources

As such there is no guarantee of deriving benefits from the existing human resources in future and has no sales value like other assets. Therefore, legally, human resource is not an asset claims one school of thought. Besides, company law also does not consider it as an asset. But the other school is of the opinion that the “human resource is an  asset“. This school of thought puts forth two contentions in favor of its opinion as follows:

  • There is a legal ownership on the “human resource” which could in practice prevent him from joining the other organizations unless properly relieved by complying with some formalities like giving advance notice of resignation, etc.
  • Uncertainty of deriving benefits is a common problem to all assets, not only with the human resources. Deriving future benefit may be a big question mark in other assets too due to many factors. ‘Obsolescence’ may be the one.
  • Generally, an asset needs maintenance and development support from the organization so as to derive benefits over a long period of time. Similarly, human resources as an asset also is in need of training and development in order to maintain the service potential for the employer.
  • Treating people as assets and accounting them is logical and satisfactory to the expectation of the future economic benefits.

The above analysis supports the view that the human resource is an asset as they are valuable resources to an organization and investments in such asset will help organization to improve.

Now, what is an investment?

Any resource pressed into service for producing good and services is called investments. Thus, investment refers to expenditure on new plant and machinery, capital equipments, physical construction of new buildings together with any change in the stock of goods produced. There are two basic determinants of investment.

  1. The expected rate of profit which the business hopes to realize from investment, and
  2. The rate of interest.

The level of investment is guided by the level of expected profits. Firms will invest, only if it is profitable. Further an important cost associated with investment is the cost of borrowing capital, which is the rate of interest. Of these two, the expected rate of profit is more influential than the rate of interest.

Cost of Human Resources

As human resource is considered as an asset, any expenditure incurred in the acquisition and accumulation of human resource will be treated as an investment. Cost of human resources represents sacrifice that will have to be incurred today to acquire and develop people in future. The cost of human resource otherwise called Historical cost of human resources is the investment in human resources which has both Revenue (expense) and Capital (asset) components. This cost may be classified as follows:

1. Acquisition Cost

It refers to the costs incurred in acquiring the right man for the right job at the right time and in right quantity. It includes the expenses incurred on recruitment, selection; entire cost is taken into consideration including those who are not selected.

  1. Recruitment cost: It is the cost incurred to identify sources of human resources both from within and outside the organization. For example, cost of recruiting materials, administrative expenses, advertising costs, agency fees, recruiter’s salary and travel and outstation costs.
  2. Selection cost: It depends on several factors such as the type of personnel being recruited and the method of recruitment. The cost of selection depends on the position for which a person is being selected. The higher the position, the greater is the selection cost. It includes cost of application blanks, administrative cost of processing applications, conducting tests, interview, medical examination and the Salaries, materials and consulting fees of the selectors.
  3. Placement cost: In deciding upon the placement, the individual’s ability, attitude, interest, temperament and aspirations are taken into consideration with reference to the job requirements. The cost of placement can be collected for the purpose of human resource accounting.

2. Training and Development Cost:

It refers to the sacrifice that must be made to train a person either to provide the expected level of performance or to enrich the individual’s skill. Training improves the productivity potential of both the individual and the organization. The training cost includes the following:

  1. Formal training cost: It refers to the cost incurred in conventional training for the orientation of an individual so that he can operate the work. The remuneration to the training staff and the fixed cost of the training schools are essentially Human Resource Investment items.
  2. On the job training cost: Once the employee is placed on the job, he must be trained to do the job efficiently and effectively and in this regard the employee learns while he is on his job. In the process, the costs of mishandling the job, the payments to the employee more than what he actually contributes are on the job training cost. Thus it is an Investment in Human Resource.
  3. Special training cost: To achieve the performance standards sometimes specific training programmes may be devised. Such training gets a distinct human resource to the organization. The costs of such training are called special training costs fall under the human resource investment of the organization.
  4. Development programmes cost: Employees may be allowed to participate in a variety of development programmes to enrich their faculties. These programmes may range from ordinary lectures to international conferences and seminars. The participants have an opportunity to interact with other executives on national and international level. Such association involves cost such as delegate fees, the travel cost, loss of output during the development programme etc. which are to be accounted for as a human resource investment.

3. Welfare Cost:

Management is after all creation and maintenance of an environment. Therefore, it is a vital function of an employer to provide an atmosphere to the employees to perform their work in healthy, congenial climate conducive to good health and high morale. The expenses incurred for this purpose will facilitate the employee to increase the quality of his civic life. These welfare costs can be classified as follows:

  1. Welfare and amenities within the organization: Crèches, rest shelters and canteens, latrines and urinals, washing and bathing facilities, drinking water and occupational safety etc. are the welfare facilities provided by the employer within the organization.
  2. Welfare outside the organization: Social insurance measures, maternity benefit, medical facilities, education facilities, housing, recreational facilities, holiday homes and leave travel facilities are some of the welfare measures provided outside the establishment.

4. Other Costs

There are some other costs which include expenditure on employee safety, ex-gratia, multi-trade incentives and others. In India, Factories Act 1948 has made statutory provisions with regard to employees’ health, safety and welfare.

Rate of Return on Human Resources

The calculation of the rate of return on human resources is vital. When large amount of investment is made on human resource building by not capitalizing such expenditure, the profits of the organization are understated. Rate of return can be used as a performance measure. The rate of return can be calculated on the basis of the following premises:

  1. Measurement of return on organization building.
  2. Measurement of return on organizational utilization.

In order to calculate return on investment, the changes in human resources must be calculated and recorded. To find out the changes in human resources, the total investment in human resources must be calculated.

  • Measurement of Return on Organization building: When an investment is made in human resources, it is both for the purpose of organization building and organization utilization. In regard to human resources investment for building the organization, the recruiting and training costs of an individual and group of individuals must be calculated. Also the orientation cost of building the personnel must be taken into account while making such calculations.
  • Measurement of Return on Organization utilization: Measurement of benefits obtained through utilization of human resources must be done. Besides, the fulfillment of objectives by the utilization of human resources must also be taken into account for the measurement of utilization.

The clubbed result of measurement of organization building and organizational utilization of human resources will provide return on investment.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.