Question

Effort IT solutions is a software company at AL Dakhaliya region of Sultanate of Oman. The motto of the company is providing software solutions for all the business needs. Currently there are 20 employees in the company. The company is doing well and it has good reputation in the region for its creative and good software solutions. This is because of the highly skilled employees at the company. Mr Abdullah, the managing director of the company is worried these days because of the human resource issues in the company. The employees of the company are getting lucrative offers from its competitors. The company is facing acute problem of labour turnover. Now Mr Abdullah feels that this would increase by the time.
One of the friend of Mr Abdullah who is a business consultant advised him that he should go for Human resource accounting in the company. This would help to identify those employees who are doing well and reward them in order to retain them. He also suggested that this would also help to tackle the problem of employee turnover and maintain the record of the amount spent on Human resources.
After considering the advice given by the consultant, Mr Abdullah wish to implement Human resource accounting in the company. Based on his research he concluded that Historical cost approach would suit best to his company.
a. Why labour turnover is an issue? What is your suggestion to Mr. Abdullah to deal with labor turnover?

b. Do you agree with the advice given by the consultant? Give reasons.

c. Apart from Historical cost approach, which Human Resource accounting approach do you suggest for a software solution company where there are highly skilled employees? Justify your answer.

d. How would the company implement Historical cost approach? Write a brief summary of the process of implementing Human resource accounting with the following costs. Recruitment cost RO 200 a. Hiring and other costs RO 150 b. Training cost RO 350 c. How would you write off these costs over the assumed life of an employee?

Answer 1

a. How frequently do employees leave a business? It's an important issue for many businesses and an insight can be provided by the labour turnover ratio.

Labour turnover is defined as the proportion of a firm's workforce that leaves during the course of a year.

It is important to remember that all businesses lose staff – for a variety of reasons:

• Retirement / Maternity / Death / Long-term Illness
• Unsuitability
• Changes in strategy (e.g. closure of locations)

In terms of this part of the course, we are more concerned with the loss of staff for reasons other than above. You might call this voluntary staff turnover – employees who leave of their own accord.

It is important to remember that labour turnover levels vary between industries. Successive surveys of labour turnover show that the highest levels are typically found in retailing, hotels, catering and leisure, call centres and among other lower paid private sector services groups.

Labour turnover levels also vary from region to region. The highest rates are found where unemployment is lowest and where it is unproblematic for people to secure desirable alternative employment.

There are many reasons why a high labour turnover figure (poor employee retention) may cause problems for a firm:

• Increases recruitment costs (e.g. advertising for replacement staff; employing temporary staff whilst the job vacancies are filled)
• Reflects poor morale in workforce and so low productivity levels
• Increases training costs of new workers
• Loss of productivity while new worker settles in

However, there are some advantages of a firm experiencing labour turnover:

• It gives the chance for new people to be brought into the business who may have fresh ideas and up to date market knowledge.
• Workers with specialist knowledge or expertise can be employed rather than having to train up existing lower skilled employees.

A business can improve its employee retention by offering:

• Financial incentives (e.g. bonus, salary rise)
• Non-financial incentives (e.g. promotion, more decision making power)
• Improving the effectiveness of its recruitment and selection processes so that fewer unsuitable employees are recruited in the first place
• Conducting research to understand why employees are leaving (through exit interviews or surveys)

A business may also have to adopt more flexible working practices in order to retain staff and fit in with the changing trend in UK employment and working patterns. For instance, there is a greater emphasis currently being placed on "flexible hours contracts" and part-time working.

b. yes, I agree with the Consultants solution because by maintaining human resource accounting company can maintain a check on employees and also can access the reasons for employees turnover and can take more actions to reduce employee turnover.

c.   There are three approaches to human resource accounting:

1. Historical Cost Approach

2. Replacement Cost Approach

3. Opportunity Cost

2. Replacement Cost Approach –

This approach was first suggested by Rensis Likert, and was developed by Eric G. Flamholtz on the basis of concept of replacement cost. Human resources of an organisation are to be valued on the assumption that a new similar organisation has to be created from scratch and what would be the cost to the firm if the existing resources were required to be replaced with other persons of equivalent talents and experience. It takes into consideration all cost involved in recruiting, hiring, training and developing the replacement to the present level of proficiency and familiarity with the organisation.

This approach is more realistic as it incorporates the current value of company’s human resources in its financial statements prepared at the end of the year. It is more representative and logical. But it suffers from the following limitations:

• This method is at variance with the conventional accounting practice of valuing assets.

• There may be no similar replacement for a similar certain existing asset. It is really difficult to find identical replacement of the existing human resource in actual practice.

• The determination of a replacement value is affected by the subjective considerations to a marked extent and therefore, the value is likely to differ from man to man.

3. Opportunity Cost –

This method was first advocated by Hc Kiman and Jones for a company with several divisional heads bidding for the services of various people they need among themselves and then include the bid price in the investment cost. Opportunity cost is the value of an asset when there is an alternative use of it. There is no opportunity cost for those employees that are not scarce and also those at the top will not be available for auction. As such, only scarce people should comprise the value of human resources.

This method can work for some of the people at shop floor and middle order management. Moreover, the authors of this approach believe that a bidding process such as this is a promising approach towards more optional allocation or personnel and a quantitative base for planning, evaluating and developing human assets of the firm. But this approach suffers from the following limitations:

• It has specifically excluded from its preview the employees scarce or not being ‘bid’ by the other departments. This is likely to result in lowering the morale and productivity of the employees who are not covered by the competitive process.

• The total valuation of human resources on the competitive bid price may be misleading or inaccurate. It may be due to the reason that a person may be an expert for one department and not so for the other department. He may be valuable person for the department in which he is working and thus command a high value but may have a lower price in the bid by the other department.

• Under this method, valuation on the basis of opportunity cost is restricted to alternative use within the organisation. In real life such alternative use may not be identifiable on account of the constraints in an organisational environment.