2020

E-LEARNING

MODERN TOOLS &

TECHNIQUES OF MCA
MANAGEMENT &
COST ACCOUNTING
E-Learning contents for personal use only.
 HUMAN RESOURCE ACCOUNTING

Human Resource Accounting is the process of assigning, budgeting, and reporting the
cost of human resources incurred in an organization, including wages and salaries and training
expenses.
Human Resource Accounting is the activity of knowing the cost invested for employees
towards their recruitment, training them, payment of salaries & other benefits paid and in return
knowing their contribution to organisation towards it's profitability.
The American Accounting Association‟s Committee on Human Resource Accounting
(1973) has defined Human Resource Accounting as “the process of identifying and measuring
data about human resources and communicating this information to interested parties”. HRA,
thus, not only involves measurement of all the costs/ investments associated with the
recruitment, placement, training and development of employees, but also the quantification of
the economic value of the people in an organisation.
Flamholtz (1971) too has offered a similar definition for HRA. They define HRA as “the
measurement and reporting of the cost and value of people in organizational resources”.

CONCEPT OF HUMAN RESOURCE ACCOUNTING

Human Resource Accounting (HRA) is a new branch of accounting. It is based on the
traditional concept that all expenditure of human capital formation is treated as a charge against
the revenue of the period as it does not create any physical asset. But now a day this concept has
changed and the cost incurred on any asset (as human resources) should be capitalized as it
yields benefits measurable in monetary terms.
Human Resource Accounting means accounting for people as the organizational
resources. It is the measurement of the cost and value of people to organizations. It involves
measuring costs incurred by private firms and public sectors to recruit, select, hire, train and
develop employees and judge their economic value to the organization.
According to Likert (1971), HRA serves the following purposes in an organisation:
 It furnishes cost/value information for making management decisions about
acquiring, allocating, developing, and maintaining human resources in order to
attain cost-effectiveness;
  It allows management personnel to monitor effectively the use of human
resources;
 It provides a sound and effective basis of human asset control, that is, whether the
asset is appreciated, depleted or conserved;
 It helps in the development of management principles by classifying the financial
consequences of various practices.

MEANING
Human resource accounting is an attempt to identify and report investments made in the
human resources of an organisation that are not presently accounted for under conventional
accounting practice. Basically, it is an information system that tells the management what
changes overtime are occurring to the human resources of the business, and of the cost and value
of the human factor to the organisation. The system may serve both the internal and external
users, providing management (internal users) with relevant data on which to base recruiting,
training and other development decisions and supplying investors, lenders and other external
users of financial statement with information concerning the investment in and utilisation of
human resources in the organisation.
Accounting is a man-made art and its principles and procedures have been evolved over a
long period to aid business in reporting for the management and public. Of the four factors of
production, viz., man, money, material and land, the last three of them are amenable to
conventional accounting, but the first one, i.e., the human resource has not been subject to such
accounting. Over the last two decades the idea of accounting for human resources is gaining
active consideration.
Much of the work on accounting for human resources focused primarily on development
or validation of HRA concepts. The traditional practice of treating all expenditure on human
capital formation as an immediate charge against income is not consistent with the treatment
accorded to comparable outlays in physical capital. The American Accounting Association
strongly critised the practice of assigning a Zero value to an asset and stated that „Costs should
be capitalised when they are incurred in order to yield future benefits and when such benefits can
be measured.‟
 Management of any concern continuously strives hard for obtaining maximum efficiency.
In order to measure the effectiveness of any firm the normal method is to examine financial
statements. These statements include balance sheets in which physical assets such as cash
accounts receivables, inventory and plant are recorded. These statements normally do not
mention the productive capacity of the workers or goodwill of the company.
HRA is the art of valuing, recording and presenting systematically the work of human
resources in the books of accounts of an organisation. Thus, it is primarily an information
system, which informs the management about the changes that are taking place in the human
resource of an organisation.

DEFINITIONS
“Human Resource Accounting is the process of identifying and measuring data about human
resources and communicating this information to interested parties.”
- American Accounting Society Committee on HRA
“Human Resource Accounting is an attempt to identify and report investments made in human
resources of an organisation that are presently not accounted for in conventional accounting
practice. Basically it is an information system that tells the management what changes over time
are occurring to the human resource in the business.”
- Woodruff
“A term used to describe a variety of proposals that seek to report and emphasize the importance
of human resources – knowledgeable, trained and loyal employees in a company earning process
and total assets.”
- Davidson and Roman L Weel
“Human resource accounting is the measurement of the cost and value of the people for the
organisation.”
- Eric Flamholtz of university of California, Los Angeles

OBJECTIVES OF HR ACCOUNTING
The objective of HRA is not merely the recognition of the value of all resources used by
the organisation, but it also includes the management of human resource which will ultimately
enhance the quantity and quality of goods and services. The main objectives of HR Accounting
system are as follows:
1. To furnish cost value information for making proper and effective management decisions
about acquiring, allocating, developing and maintaining human resources in order to
achieve cost effective organisational objectives.
2. To monitor effectively the use of human resources by the management.
3. To have an analysis of the human assets i.e. whether such assets are conserved, depleted
or appreciated.
4. To aid in the development of management principles. and proper decision making for the
future by classifying financial consequences of various practices.
5. In all, it facilitates valuation of human resources recording the valuation in the books of
account and disclosure of the information in the financial statement.
6. It helps the organisation in decision making in the following areas:
7. Direct Recruitment vs. promotion, transfer vs. retention, retrenchment vs. retention,
impact on budgetary controls of human relations and organisational behaviour, decision
on reallocation of plants closing down existing units and developing overseas subsidiaries
etc.

ADVANTAGES OF HR ACCOUNTING
Human Resource Planning anticipates not only the required kind and number of
employees but also determines the action plan. The major benefits of HR accounting are:
1. It checks the corporate plan of the organisation. The corporate plan aiming for expansion,
diversification, changes in technological growth etc. has to be worked out with the
availability of human resources for such placements or key positions. If such manpower
is not likely to be available, HR accounting suggests modification of the entire corporate
plan.
2. It offsets uncertainty and change, as it enables the organisation to have the right person
for the right job at the right time and place.
3. It provides scope for advancement and development of employees by effective training
and development.
4. It helps individual employee to aspire for promotion and better benefits.
5. It aims to see that the human involvement in the organisation is not wasted and brings
high returns to the organisation.
6. It helps to take steps to improve employee contribution in the form of increased
productivity.
7. It provides different methods of testing to be used, interview techniques to be adopted in
the selection process based on the level of skill, qualifications and experience of future
human resources.
8. It can foresee the change in value, aptitude and attitude of human resources and
accordingly change the techniques of interpersonal management.
 TARGET COSTING

DEFINITION
Target costing can be viewed as a proactive cost management tool used to reduce the
total cost of the product, over its complete lifecycle, through production, engineering, research
and design. It helps the firm in managing the business in reaping profits in the extremely
competitive market.
Simply put, target costing is a process of ascertaining and attaining full stream cost, at
which the intended product with specific requirements, must be produced so as to realise the
desired profits, at an anticipated selling price over a specified period. It involves the discernment
of maximum cost to be incurred on a new product, followed by the development of sample that
can be profitably created for that target cost figure.

Target Costing and Product Development Phase

In this technique, the costs are planned and managed out of the product or process early
in the introduction phase like development or designing, instead of performing it in the latter
phase of product development.
Target Costing applies to new products and succeeding generations of a product. It begins
with understanding the market thoroughly and an intention to satisfy customer needs, concerning
product quality, features, timeliness and price.
 TARGET COST
Target Cost = Anticipated selling price – Desired profit
Target Cost refers to an estimate of product cost reached by deducting a desired profit
margin from the competitive market price.

TARGET COSTING PROCESS

Establishment Phase of Target Cost

1. Determine selling price for the new product and estimated output from market analysis
and target profit.
2. Ascertainment of the target cost by deducting the profit from the selling price.
3. Functional cost analysis for specific components and processes
4. Decide the estimated product cost.
5. Make comparison between estimated cost and target cost.
6. If the estimated cost is greater than the targeted one, then repeat cost analysis, to reduce
the estimated cost.
7. Final decision to be taken, on the introduction of the product, once the estimated cost is
on target.
8. Cost management while production is performed.

Attainment Phase of Target Cost

 In target costing process, the cost which is directly influenced by it is given priority,
which includes material and purchase parts, tooling cost, conversion cost, development expenses
and depreciation. Nevertheless, it is a comprehensive cost management technique, so all those
cost and assets which are influenced by initial product planning decision are taken into account.

TARGET COSTING PRINCIPLES

 Price-led costing
 Cross functional teams
 Customer focus
 Focus on product design and process
 Lifecycle cost reduction
 Value Chain involvement
Target Costing is all about planning or projecting the cost of a product prior to its
introduction, to make sure that products with low margin are not introduced, as they are not able
to reap sufficient returns. It is also used for controlling the design specification and production
techniques, and encouraging a focus on the customer.
 RESPONSIBILITY ACCOUNTING

Responsibility accounting is a system of accounting where specific persons are made

responsible for the accounting of specific area and cost control. If that cost increases then the
person will be held responsible and answerable. In this type accounting system, responsibility is
assigned on the basis of a person‟s knowledge and skills and the proper authority is given to that
person so that he can make a decision and show his performance.

STEPS OF RESPONSIBILITY ACCOUNTING

Below are the steps or formula of Responsibility Accounting.
1. Define responsibility center.
2. Target should be fixed for each responsibility center.
3. Track the actual performance of each responsibility center.
4. Compare actual performance with a Target performance.
5. The variance between actual performance and target performance are analyzed and
corrective action is taken by the management

TYPES OF RESPONSIBILITY CENTER

Below are the types of responsibility center.
Type #1 – Cost Center
These are the center in which individual persons are responsible only for cost control,
they are not responsible for any other functions. In this center, it is essential to differentiate the
controllable costs and uncontrollable costs. A person responsible for a particular cost center will
be held responsible only for controllable cost. Performance of each center is evaluated by
comparing the actual cost VS targeted cost.

Type #2 – Profit Center

These are the center whose performance is measured in terms of cost and revenue.
Generally, the Factory of the company is treated as a profit center where consumption of raw
material is a cost and finished product sell to its other department is revenue.
Type #3 – Investment Center
A manager responsible for these centers is responsible for utilizing the assets of the
company in the best manner so that the company can earn a good return on capital employed.

COMPONENTS OF RESPONSIBILITY ACCOUNTING

Below are the Components of Responsibility Accounting:
Inputs and Outputs – The implementation of responsibility accounting based upon information
relating to inputs and outputs. The resource utilized in an organization like qty of raw material
consumed, Labor hours consumed are termed as Inputs and finished product generated are
termed as outputs.
Identification of Responsibility Center – The whole concept of responsibility accounting
depends upon identification of responsibility center. The responsibility center defines the
decision point in the organization. In small organization generally, one person who is probably
owners of the firm can manage the entire organization.
Target and Actual Information – Responsibility accounting requires target or budget data and
Actual data for performance evaluation of the responsible manager of each responsibility center.
Responsibility between Organization Structure and Responsibility Center – An organization
structure with clear authority and responsibility required for a successful responsibility
accounting system. Similarly, the responsibility accounting system must be designed as per the
organization structure.
Assigning Cost and Revenue to an Individual – After defining the authority – responsibility
relationship, cost, and revenue which are controllable should be assigned to individuals for
evaluating their performance.
 INFLATION ACCOUNTING

It is a newly introduced concept in the financial world. Inflation accounting refers to the
adjustment of the financial statements during the inflationary periods. This special accounting
technique is only used in inflationary periods where the general level of prices is usually high for
three consecutive quarters.
It involves the recording of the income and expenditure of the business at the current
prices and reinstating all the three statements of the company and analyze the cost and the trend
of the current company.

TYPES AND COMPONENTS OF INFLATION ACCOUNTING

There are various kinds of techniques that are involved in the inflation accounting and
there are various methods attached to it.
1. Current Purchasing Power Method
This technique involves adjustment of the financial statements to the current price
changes. It involves recalculating the historical financial figures of the company at
the current purchasing power which is done by applying a certain conversion factor.
2. Current Cost Accounting
Under this method, the cost categories and the various cost items and the items in the
balance sheet are shown at the current cost rather than the historical cost and the
profit is determined on the actual cost period and not on the basis of the sales.
3. Current Value
Under this method, all assets and liabilities are measured and are reinstated at their
current cost structure.
4. Replacement Cost Accounting
The cost of replacing is the parameter under which all the assets and the liabilities on
the balance sheet are recorded.
 ACTIVITY-BASED COSTING (ABC)

Activity-based costing (ABC) is a methodology for more precisely allocating overhead

costs by assigning them to activities. Once costs are assigned to activities, the costs can be
assigned to the cost objects that use those activities. The system can be employed for the targeted
reduction of overhead costs. ABC works best in complex environments, where there are many
machines and products, and tangled processes that are not easy to sort out. Conversely, it is of
less use in a streamlined environment where production processes are abbreviated.

ABC PROCESS FLOW

Activity-based costing is best explained by walking through its various steps. They are:
 Identify costs. The first step in ABC is to identify those costs that we want to allocate.
This is the most critical step in the entire process, since we do not want to waste time
with an excessively broad project scope. For example, if we want to determine the full
cost of a distribution channel, we will identify advertising and warehousing costs related
to that channel, but will ignore research costs, since they are related to products, not
channels.
 Load secondary cost pools. Create cost pools for those costs incurred to provide services
to other parts of the company, rather than directly supporting a company‟s products or
services. The contents of secondary cost pools typically include computer services and
administrative salaries, and similar costs. These costs are later allocated to other cost
pools that more directly relate to products and services. There may be several of these
secondary cost pools, depending upon the nature of the costs and how they will be
allocated.
 Load primary cost pools. Create a set of cost pools for those costs more closely aligned
with the production of goods or services. It is very common to have separate cost pools
for each product line, since costs tend to occur at this level. Such costs can include
research and development, advertising, procurement, and distribution. Similarly, you
might consider creating cost pools for each distribution channel, or for each facility. If
production batches are of greatly varying lengths, then consider creating cost pools at the
batch level, so that you can adequately assign costs based on batch size.
 Measure activity drivers. Use a data collection system to collect information about the
activity drivers that are used to allocate the costs in secondary cost pools to primary cost
pools, as well as to allocate the costs in primary cost pools to cost objects. It can be
expensive to accumulate activity driver information, so use activity drivers for which
information is already being collected, where possible.
 Allocate costs in secondary pools to primary pools. Use activity drivers to apportion the
costs in the secondary cost pools to the primary cost pools.
 Charge costs to cost objects. Use an activity driver to allocate the contents of each
primary cost pool to cost objects. There will be a separate activity driver for each cost
pool. To allocate the costs, divide the total cost in each cost pool by the total amount of
activity in the activity driver, to establish the cost per unit of activity. Then allocate the
cost per unit to the cost objects, based on their use of the activity driver.
 Formulate reports. Convert the results of the ABC system into reports for management
consumption. For example, if the system was originally designed to accumulate overhead
information by geographical sales region, then report on revenues earned in each region,
all direct costs, and the overhead derived from the ABC system. This gives management
a full cost view of the results generated by each region.
 Act on the information. The most common management reaction to an ABC report is to
reduce the quantity of activity drivers used by each cost object. Doing so should reduce
the amount of overhead cost being used.