Cost approach method & Limitations of HR Accounting

[Suraya Yasmen]

Cost approach method & Limitations of HR Accounting

Cost approach
  This approach is also called an acquisition cost model. This method measures the organization's investment in employees using the five parameters: recruiting, acquisition, formal training and familiarization, informal training and informal familiarization, and experience and development. This model suggests that instead of charging the costs to profit and loss statement (p&l) accounting, it should be capitalized in the balance sheet. The process of giving a status of asset to the expenditure item is called capitalization.

In human resource management, it is necessary to amortize the capitalized amount over a period of time. So, here one will take the age of the employee at the time of recruitment and at the time of retirement. Out of these, a few employees may leave the organization before attaining the superannuation. This method is the only method of Human Resource Accounting that is based on sound accounting principles and policies.

Limitations
    1.The valuation method is based on the false assumption that the dollar is stable.
    2.Since the assets cannot be sold there are no independent checks of valuation.
    3.This method measures only the costs to the organization, but ignores completely any measure of the value of the employee to the organization.
    4.It is too tedious to gather the related information regarding the human values.
    5.It may be possible that the employee is already fully trained and there is no need to employ any development, training, recruitment cost.It will create difficulty for a company to find out CTC according to acquisition model.
    6.Does not account for software which can reduce the overall cost of human resources from by having integrated software completing the tasks of staff.

Source: Wikipedia