Diff. Mgt Concepts

8/6/2019 Diff. Mgt Concepts

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The past few decades have witnessed a global transitionfrom manufacturing to service based economies. Thefundamental difference between the two lies in the verynature of their assets. In the former, the physical assets likeplant, machinery, material etc. are of utmost importance. In

contrast, in the latter, knowledge and attitudes of theemployees assume greater significance. For instance, inthe case of an IT firm, the value of its physical assets isnegligible when compared with the value of the knowledgeand skills of its personnel. Similarly, in hospitals, academicinstitutions, consulting firms etc., the total worth of the

organization depends mainly on the skills of its employeesand the services they render.


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` in order to estimate and project the worth of thehuman capital, it is necessary that some methodof quantifying the worth of the knowledge,

motivation, skills, and contribution of the humanelement as well as that of the organisationalprocesses, like recruitment ,selection, trainingetc., which are used to build and support thesehuman aspects, is developed. Human resource

accounting (HRA) denotes just this process ofquantification/measurement of the HumanResource.


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` The American Accounting Associations Committee onHuman Resource Accounting (1973) has definedHuman Resource Accounting as the process ofidentifying andmeasuring data about human

resources and communicating this information tointerested parties. HRA, thus, not only involvesmeasurement of all the costs/investments associatedwith the recruitment, placement, training anddevelopment of employees, but also the quantification

of the economic value of the people in anorganisation.


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` According to Likert (1971), HRA serves the followingpurposes in an organisation:

` l It furnishes cost/value information for makingmanagement decisions about acquiring, allocating,developing, and maintaining human resources in order to

attain cost-effectiveness;` l It allows management personnel to monitor effectively the

use of human resources;` l It provides a sound and effective basis of human asset

control, that is, whether the asset is appreciated, depletedor conserved;

` l It helps in the development of management principles byclassifying the financial consequences of various practices.


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` The traces of a rudimentary HRA can be found in theMedieval European practice of calculating the cost ofkeeping a prisoner versus the expected future earningsfrom him. The prisoners in those days were seen to be thegeneral property of the capturing side. Consequently, after

the victory a quick decision regarding whether to capture aprisoner or to kill him had to be taken based on the costsinvolved in keeping him and the benefits accruing fromkilling him. However, these represented very roughmeasurements with limited use. The development of HRAas a systematic and detailed academic activity, according

to Eric G Falmholtz (1999) began in sixties. He divides` the development into five stages. These are


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` This marks the beginning of academic interest in

the area of HRA. However, the focus was primarily

on deriving HRA concepts from other studies like

the economic theory of capital, psychologicaltheories of leadership- effectiveness ,the emerging

concepts of human resource as different from

personnel or human relations; as well as the

measurement of corporate goodwill.


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The focus here was more on developing and validatingdifferent models for HRA. These models covered bothcosts and the monetary and non-monetary value of HR.The aim was to develop some tools that would help theorganisations in assessing and managing their humanresource/asset in a more realistic manner. One of theearliest studies here was that of Roger Hermanson, who aspart of his Ph.D. studied the problem of measuring thevalue of human assets as an element of goodwill. Inspiredby his work, a number of research projects were

undertaken by the researchers to develop the concepts andmethods of accounting for human resource.


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` This period was marked by a widespread interest

in the field of HRA leading to a rapid growth of

research in the area. The focus in most cases was

on the issues of application of HRA in businessorganisations. R.G. Barry experiments contributed

substantially during this stage.


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` This was a period of decline in the area of HRA

primarily because the complex issues that needed

to be explored required much deeper empirical

research than was needed for the earlier simplemodels. The organisations, however, were not

prepared to sponsor such research. They found

the idea of HRA interesting but did not find much

use in pumping in large sums or investing lot oftime and energy in supporting the research.


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` There was a sudden renewal of interest in the field of

HRA partly because most of the developed economies

had shifted from manufacturing to service economies

and realized the criticality of human asset for their

organisations. Since the survival, growth and profits of

the organisations were perceived to be dependent

more on the intellectual assets of the companies than

on the physical assets, the need was felt to have more

accurate measures for HR costs, investments andvalue.


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` The biggest challenge in HRA is that of assigning monetaryvalues to different dimensions of HR costs, investmentsand the worth of employees. The two main

` approaches usually employed for this are:1. The cost approach which involves methods based on

the costs incurred by the company, with regard to anemployee.

2. The economic value approach which includesmethods based on the economicvalue of the humanresources and their contribution to the companys gains.This approach looks at human resources as assets andtries to identify the stream of benefits flowing from theasset.


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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.

Arriving at a clear distinction between the two,

however,remains an accounting problem even today(Flamholtz, 1999).


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` Two types of costs are of special importance in HRA.

These are original or historical cost, and replacement

cost. The historical cost of human resources is the

sacrifice thatwas 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

instance, are direct costs, other costs like the time

spent by the supervisors during induction and training,are indirect costs.


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` opportunity cost method, that is, a calculation

of what would have been the returns if the

money spent on HR was spent on something else,

is also used. However, this method is seen to benot as objective as desired. Hence its use is

restricted to internal reporting and not external

reporting


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` The value of an object, in economic terms, is thepresent value of the services that it is expected torender in future. Similarly, the economic value ofhuman resources is the present worth of the

services that they are likely to render in future.This may be the value of individuals, groups or thetotal human organisation. The methods forcalculating the economic value of individuals may

be classified into monetary and non-monetarymethods.


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a) Flamholtzs model of determinants of

Individual Value to Formal Organisations

b) Flamholtzs Stochastic Rewards Valuation

Modelc) The Lev and Schwartz Model

d) Hekimian and Jones Competitive Bidding

Model


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1)The skills or capability inventory is a simple listing ofthe education, knowledge, experience and skills of thefirms human resources. Performance evaluationmeasures used in HRA include ratings, and rankings.

2)Ratings reflect a persons performance in relation to aset of scales. They are scores assigned tocharacteristics possessed by the individual. Thesecharacteristics include skills, judgment, knowledge,interpersonal skills, intelligence etc. Ranking is anordinal form of rating in which the superiors ranktheir

subordinates on one or more dimensions, mentionedabove.


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` Assessment of potential determines a persons

capacity for promotion anddevelopment. It usually

employs a trait approach in which the traits essential

fora position are identified. The extent to which the

person possesses these traits is then assessed.

4. Attitude measurements are used to assess

employees attitudes towards their job, pay, working

conditions, etc., in order to determine their job

satisfaction and dissatisfaction.


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` Environmental Accounting Overview

What is environmental accounting

Why do environmental accounting

What is an environmental cost

` System Strategies

Reactive, Proactive, Leadership

` Business Purpose and Application

Example - Cost Allocation

` Methodologies


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What is environmental accounting?

A flexible tool to provide information not necessarily

provided in traditional managerial systems.


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` Goal of environmental accounting is to

increase the amount of relevant data for

those who need or can use it.

` Relevant data depends on the scale

and scope of coverage


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` Applicable at different scales of use and scopes

(types) of coverage. Application at an individual process level (production

line), a system, a product, a facility, or an entire company

level.

Coverage (focus) may include specific costs, avoidable

costs, future costs and/or social external costs


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` Decisions on scale and scope of application

significantly impact ability to assess and measure

environmental costs

Process vs Facility Discreet costs vs Hidden vs Contingent vs Image Costs


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` Environmental cost can be significantly reduced

or eliminated as a result of business decisions.

` Environmental costs may provide no addedvalue to a process, system or product (i.e.

waste raw material )

`

Environmental costs may be obscured ingeneral overhead accounts and overlooked

during the decision making process.


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` Understanding environmental costs can lead

to more accurate costing and pricing of

products.

` Competitive advantage with customers is

possible where processes and products can

be shown as environmentally preferable.


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` Major challenge in application of environmental

accounting as a management tool is identifying

relevant costs.

` Cost definition determined by intended use of data(i.e. cost allocation, budgeting, product/process

design or other management decision support).


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` Types of Environmental Costs

Conventional: material, supplies, structure and capital costsneed to be examined for environmental impact on decisions.

Potentially Hidden:

x Regulatory (fees, licenses, reporting, training, remediation)

x Upfront and back end (site prep, engineering, installation, closureand disposal)

x Voluntary (training, audits, monitoring and reporting)

Contingent: penalties/fines, property liability, legal)

Image: Relationship with employees, customers, suppliers,regulators and shareholders


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` Flexible tool to provide relevant data not

ordinarily captured in traditional systems.

` Successful application requires up-frontunderstanding of scale and scope of application.

` Once identified, information needs to be

communicated/distributed to decision makers

and considered as a component of

managements decision making criteria


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` Environmental Accounting systems typically fall

into one of three categories: Reactive

Proactive

Leadership


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` Typically spread costs (capital and expense)

across various overhead categories.

`

Environmental costs typically not assigned tospecific line/process or activity.

` Reactive system fails to provide indication or

quantification of environmental costs.

` As a result it fails to identify cost drivers and

minimizes opportunity to develop tactics to

reduce these costs.


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` Costs are categorized and assigned to

specific process and activities.

` Costs incurred can be identified, classifiedand quantified but are limited to discreet

costs.

` Decisions typically focus on incrementalactivities ( i.e. minimize waste, etc.).


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` Includes both financial and non-financial issues

in the relevant data used in the business

decision process.

` Systems are designed to include value chainperspectives.

` Both the process as well as the product are

evaluated for relationship between inputs andoverall value provided to minimize total costs.


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` Utilization of data generated from application of

environmental accounting tool can be used for a

variety of decision classes including: Cost allocation

Capital budgeting

Product design


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` Goal - Bring environmental costs to attention of

corporate stakeholders.

` Four steps in environmental cost allocation:

Determine scale and scope of the application Identify environmental costs

Quantify those costs

Allocate those costs to responsible product, process or

system


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Other

OverheadToxic Waste

Product B

Product A

Allocated

Overhead

Product B


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Other

OverheadToxic Waste

Product B

Product A

Allocated

Overhead

Product B


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` Application of Environmental Accounting typically

used in conjunction with: Activity Based Costing (ABC)

Total Quality Management (TQM)

Business Process Re-engineering

Balanced Score Card


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` Decrease in purchasing power of money due to anincrease in the general price level

` A process of steadily rising prices resulting in

diminishing purchasing power of a given nominal sum

of moneyThe Penguin Dictionary of Economics

` Rise in prices brought about by the expansion of the

supply of bank money, credit, etc.

Oxford Advanced Learners Dictionary ofCurrentEnglish


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Problems:

` Subjectivity

` Often complicated calculations

Benefits:` maintaining production capacity

` shows the internal logic of accounting


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` The implied assumption that value of money will

remain stable is not true.

` Value of money has been fluctuating in all parts of

the world quite violently.` The instability of the measuring rod of the

accountant had distorted both the revenue

statement and Balance Sheet.


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` P&L Account will show more profit than the actual

profit because depreciation provision is not

enough and closing stock is valued higher due to

inflation.

` More of income tax and dividends will be paid

` Balance sheet will show fixed assets at historical

cost and current assets at current cost.

` Provision for depreciation will be not enough toreplace the asset.


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1) Putting a note in accounts

2) Replacement reserve method

3) Partial change method

4) Current cost accounting method


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` In the Balance Sheet fixed assets should be

shown at their value to the business

` The value of land and building owned by the

business will be normally the open market value.` Plant and Machinery, furniture and fittings,

vehicles etc. should be valued at their net current

replacement cost.


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` The depreciation charged should reflect the value

to the business of the assets used.

` Investments which are not held as current assets

should be valued at their cost to the business.` Stock in trade and work in progress should be

valued at lower of the current replacement cost or

net realizable value

` Debtors, cash and current liabilities should beShown at their present value.


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` P&L account should be prepared on the basis of

current cost accounting.

` Surplus and deficit due to changes in value of

assets should be adjusted to revaluation reserveaccount and this reserve should be kept

separately from the General reserve.


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` It is now believed that responsibility of the

business manager is not only to earn maximum

profits for its owners but they owe some

responsibility to the society also.


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There are three approaches1) The first approach belongs to classical economists.

They believed that the only responsibility of abusiness is to earn maximum profit.

2) The second approach is a compromise which statesthat the social objectives must be attained in relationto the maximisation of wealth.

3) The third approach is a radical one. According to thisapproach the goal of the business should not bemaximum income but only a satisfactory level of

income compatible with the attainment of socialgoals.


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` Social responsibility accounting is in

underdeveloped stage and there are certain

obstacles in its development

1) There is no clear definition of social objectives.2) There is no yardstick to measure the results of

the programmes undertaken by the company to

fulfill its social responsibility.

3) No one is able to make cost benefit analysis andcost effectiveness analysis.


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` There are five possible areas in which companies

contribute by way of their corporate social

responsibility.

1)Net income contribution2) Human resource contribution

3)Public contribution

4) Environmental contribution

5) Product or service contribution


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` Various companies adopt various methods ofpresenting there performance in the field of socialresponsibility. Three most commonly used methodsare as follows

1) Some companies give a separate section in annualreports

2) The information is conveyed in a separate section inthe Presidents letter to shareholders.

3) It is mentioned as a major topic of interest

In the report.

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Diff. Mgt Concepts

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