human resource valuation

2. Contents
 Classification of Human Resource
Valuation
 Historical Cost Method
 Replacement Cost Method
 Opportunity Cost Method

3. Methods of Human Resource Valuation
Monetary
measures
Historical cost
method
Replacement
cost method
Opportunity
cost method
Economic
value method
Non monetary
measures
Expected
realizable value
method
Discounted
present value of
future earning

4.  Historical cost method was developed by Sir
Rensis Likert and his associates and this
method was adopted by R.G.Barry
Corporation,Ohio Columbia,U.S.A in1968
 This method is based on conventional
accounting and involves capitalization of the
cost incurred on the development of human
resource because such resources are
expected to yield benefits beyond the current
accounting period.

5. …contd
 Thus the amount actually spent on
recruitment,selection,placement,training and learning
which determines the investment in the human asset
is accumulated and amortized annually over the
expected length of services of the employees.
 The unexpired cost-the amount yet to be amortized-represents
the amount of firm’s investment in the
human resource. In case the employee leaves the
organisation before the expiry of the expected
services life period ,the firm would write off the entire
amount of unexpired cost against the revenue of the
period in which he leaves.

6. Advantages of historical cost
method
The application of this method is simple
and its mechanism is easy to understand.
It helps in measurement of return on the
investment made in human resource.
It satisfies the matching principle of
conventional accounting.
It assists in manpower planning and
control.

7. Limitations of historical cost
method
It is difficult to determine the amount to be amortized every year as
it depends on the length of employees service about which firm’s
management can not be sure.
Historical cost method fails to reflect the real potential of human
resource.The asset side of balance sheet shows simply the
unexpired cost of human resource but not its real worth in terms
of skill.
The amortization of cost indicates a decrease in the value of asset
year after year But actually the value of human resource increases
year after year with

8. Replacement Cost Method:
 Replacement cost method as an alternative method
for Historical Cost Method was initially developed by
Hekimian and Jones.
 According to them the value of firm’s human
resource is the replacement cost of such resource.
 In the opinion of Flamholtz the value of human
resource involves two forms of replacement cost--
Individual Replacement Cost and Positional
Replacement cost.

9. …contd
 Individual Replacement Cost refers to the cost
incurred by a firm to replace an employee with an
equivalent substitutes in terms of skill, ability and
knowledge whereas and Positional Replacement
cost refers to the cost of replacing the set of
services expected to be rendered by an employees
at the respective positions he holds and will hold at
present as well as in future thus under the method
the human resource investments shall appear in the
balance sheet at replacement cost of human
resource instead of historical cost.

10. Advantages of Replacement Cost
Method:
 Under this method the balance method is
limited sheet reveals a realistic value of
investment in human assets as it is shown at
current economic value
 It has greater flexibility it allows for change in
the cost

11. Limitations:-
 The practical utility of this method is limited as
it may not be always possible to find exact
replacement for an outgoing employee
 This method is against the cost principle of
accounting
 This method is subjective as there is no
uniform procedure of determining replacement
cost different managers may arrive at different
calculations

12. Opportunity Cost Method:
 In order to overcome the limitations of replacement
cost method , Hekimian and Jones suggested the
use of opportunity cost method which determines the
value of human resource on the basis of an
employee’s value in alternative uses.
 Accordingly the value of an employee is based on
his opportunity cost-the price, other divisions are
willing to pay for the service of an employee working
in another divisions of an organisation.

13. …contd
 Thus the value of an employee would be high
if he has several alternatives uses for
deployment in the various divisions of an
enterprise.
 This brings to light an important fact that the
opportunity cost is linked with scarcity. This
approach determines the value of human
resources by establishing competitive bidding
within an organisation.

14. Advantages of Opportunity cost
Method:
This method ensures optional allocation of
human resource.
It provides a quantitative base for
planning,evaluating and developing
human resources of organization.

15. Limitations:-
 This method fails to accommodate the possibility
of hiring of employees of similar
efficiency,experience and skill.
 It excludes from its purview those members of
the firm’s human resource who are not scarce
and therefore are not being bid by other
divisions of the organisations .
 The application of this method is doubtful unless
the alternatives uses of an employee’s service
available in an organisation are traced out.