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List & Explain the Methods of HR Accounting

by Forest Time, Demand Media

The purpose of human resource (HR) accounting is to assign a dollar value to either
individual employees at a company or the company's workforce as a whole. Because trained
and productive employees are valuable to an organization, they are sometimes referred to
as human capital. Because there is no definitive way to calculate the value of an employee,
HR accounting uses several different methods.

Standard Cost
The standard cost method of human resource accounting involves determining the total cost
of recruiting and hiring each employee, as well as the cost of any training or development.
According to the standard cost method, the economic value of an employee is the total of
these expenditures, and the annual economic value of the entire workforce is equal to the
total amount of money spent on recruiting, hiring, training and developing all employees
during the year.

Replacement Cost
The replacement cost method of HR accounting values an employee in terms of the amount
it would cost the company to replace him. This method holds that the economic worth of a
worker is equal to the estimated cost of recruiting, hiring and training a replacement, or of
finding an employee with a similar set of skills and talents.
Related Reading: Accounting Methods & Disadvantages

Opportunity Cost
The opportunity cost method of human resource accounting, also referred to as the
competitive bidding model, assigns value to an employee based on what each department
would be willing to pay him. This method envisions a fictitious situation in which a company
suddenly finds labor and talent scarce and individual divisions or departments within the
company must bid on existing employees.

Economic Value
The economic value model of human resource accounting involves estimating the total
inflow of cash that will be produced by an employee over the course of his service to the
company. Subtract the total cost of hiring, training, developing and paying an employee
from the estimate of the cash he will generate for the company, and you have arrived at his
net worth according to the economic value method of HR accounting.
1. Historical Cost Approach

The historical cost of human resources is very similar to the book value of the other physical assets.
When an employee is recruited by a firm, he is employed with the obvious expectation that the returns
from him will far exceed the cost involved in selecting, developing and training in the same manner as the
value of fixed assets is increased by making additions to them. Such additional costs incurred in training
and developing is also capitalised and are amortised over the remaining life. The unexpired value is
investment in human assets.
This method is simple to understand and easy to work out. It meets the traditional accounting concept of
matching cost with revenue. It can provide a basis of evaluating a companys return on its investment in
human resources.

Five Types of Budgets in Managerial Accounting

Managerial accounting approaches a company's financial situation in an operational way, giving
information in a manner that supports managers in planning and control procedures. Various budget
formats in managerial accounting influence how a manager forecasts department activity and how he
addresses progress or shortfall to meet goals. Companies may use several types of managerial budgets

Master Budget
A master budget is a comprehensive projection of how management expects to conduct all
aspects of business over the budget period, usually a fiscal year. The master budget
summarizes projected activity by way of a cash budget, budgeted income statement and
budgeted balance sheet. Most master budgets include interrelated budgets from the various
departments. Managers typically use these subset budgets to plan and set performance
objectives. Master budgets are generally used in larger businesses to keep many managers
on the same page.

Operational Budgets
The operational budget covers revenues and expenses surrounding the day-to-day core
business of a company. Revenues represent sales of products and services; expenses define
the costs of goods sold as well as overhead and administrative costs directly related to
producing goods and services. While budgeted annually, operating budgets are usually
broken down into smaller reporting periods, such as weekly or monthly. Managers compare
ongoing results to budget throughout the year, planning and adjusting for variations in
Related Reading: Overview of Managerial Accounting Practices

Cash Flow Budget

A cash flow budget examines the inflows and outflows of cash in a business on a day-to-day
basis. It predicts a company's ability to take in more money than it pays out. Managers

monitor cash flow budgets to pinpoint shortfalls between expenses and sales -- times when
financing may be needed to cover overheads. Cash flow budgets also suggest production
cycles and inventory levels so that a company's resources are available for activity, not
sitting idle on warehouse shelves.

Financial Budget
A financial budget outlines how a business receives and spends money on a corporate scale,
including revenues from core business plus income and costs from capital expenditures.
Managing assets such as property, buildings, investments and major equipment may have a
significant effect on the financial health of a company, particularly through the peaks and
troughs of daily business. Executive managers use financial budgets to leverage financing
and value the company for mergers and public offerings of stock.

Static Budget
A static budget contains elements where expenditures remain unchanged with variations to
sales levels. Overhead costs represent one type of static budget, but these budgets aren't
confined to traditional overhead expenses. Some departments may have a fixed amount of
money set in budget to spend, and it is up to managers to make sure such amounts are
spent without going over-budget. This condition occurs routinely in public and nonprofit
sectors, where organizations or departments are funded largely by grants.

What is responsibility accounting?

Responsibility accounting involves a company's internal accounting and budgeting. The

objective is to assist in the planning and control of a company's responsibility centerssuch
as decentralized departments and divisions.
Responsibility accounting usually involves the preparation of annual and monthly budgets for
each responsibility center. Then the company's actual transactions are classified by
responsibility center and a monthly report is prepared. The reports will present the actual
amounts for each budget line item and the variancebetween the budget and actual amounts.
Responsibility accounting allows the company and each manager of a responsibility center to
receive monthly feedback on the manager's performance.

Essential Features of Responsibility Accounting

An analysis of the definitions given above reveals the following important
features or fundamental aspects of responsibility accounting-


outputs or
Costs and
Revenues: The
implementation and maintenance of responsibility accounting system
is based upon information relating to inputs and outputs. The physical
resources utilized in an organization such quantity of raw material
used, labour hours consumed are termed as inputs. These inputs
expressed in monetary terms are known as costs.Similarly output
expressed in monetary terms are called revenue.


Planned and Actual Information or Use of Budgeting: Effective

responsibility accounting requires both planned and actual financial
information. It is not only historical cost and revenue data but also
planned future data which is essential for implementation of
responsibility accounting system. It is through budgets that
responsibility for implementing plans is communicated to each level of


Identification of Responsibility Centres: The responsibility

centres represent the sphere of authority or decision points in an
organisation. However, for effective control a large firm is divided
into meaningful segments, departments or divisions, which are called
responsibility centres. A responsibility center is under the control of
an individual who is responsible for control of activities of that sub
unit of the organisation.


Relationship Between Organisation Structure and Responsibility

Accounting System:Responsibility accounting system must be so
designed as to suit the organization structure of organization. It must
be founded upon existing authority responsibility relationship in
organization. In fact, responsibility accounting system should parallel
the organisation structureand provide financial information to
evaluate actual results of each individual responsible for a function.


Performance Reporting: Responsibility accounting is a control

device. A
such that deviations from the plans must be reported at earliest so
as to take corrective action for future. The deviations can be known
only when performance is reported. Thus, responsibility accounting

system is focused on performance reports also known as responsibility

reports, prepared for each responsibility unit.

Management: The function
of responsibility
accounting system becomes more effective if participative style
of management is followed, wherein, the plans are laid according to
mutual consent and decisions reached after consulting the
subordinates. It provides motivation to workers by ensuring their
participation and self imposed goals.


Management by Exception: An effective responsibility accounting

system must provide for management by exception i.e, it should focus
attention of management on significant deviationsand not burden
them with all kinds of routine matters, rather condensed
reports requiring theirattention must be sent to them particularly
at higher levels of management.


Human Aspect of Responsibility Accounting. To ensure success

of responsibility accountingsystem it must look into human aspect
also by considering needs of subordinates, developing mutual
interests, providing
measures and
adjusting according to requirements.


Transfer Pricing Policy: In a large-scale enterprise having

decentralised divisions, there is common practice of transfering
goods and services from one segment of organization to other.In such
situations, there is a need to determine the price at which the
transfer should take place so that costs and revenues could be
properly assigned. The significance of the transfer price can well be
judged from the fact that for the transfering division it will be source
of revenue, whereas for division to which transfer is made it will be
element of cost. Hence, thereis need of having proper transfer
policy for successful implementation of responsibility accounting

ADVANTAGES/ Significance of Responsibility Accounting

Responsibility is very important in every type of business. The following
are some of the advantages of responsibility accounting.

Assigning of Responsibility: Each and every individual in

organisation is assigned some responsibility and they are accountable
for their work. Everybody knows what is expected of him. No body
can shift responsibility to anybody else if something goes
wrong. So, under this system responsibility is assigned individually.


Improves Performance: The persons incharge for different

activities know that their performance will be reported to top
management. They will try to improve their performance.On the
other hand, it acts as a deterrent for low performance also because
persons know that they are accountable for their work and they will
have to explain for their low performance.


Helpful in cost planning: Under system of responsibility

accounting full information is collected about costs and
revenues. This data is helpful in planning of future costs and
revenues, fixing of standards and preparing of budgets.


Delegation and Control: This system enables the management to

delegate authority while retaining overall control. The authority is
delegated according to requirements of tasks assigned. On other hand
responsibility of various persons is fixed which is helpful in controlling
their work. The control remains with top management because
performance of every cost centre is regularly reported to
it. So, management is able to delegate authority and at the same
time to retain control.


Helpful in Decision-making: The information collected under

this system is helpful to management in planning its future
actions. The past performance of various cost centre also helps in
fixing their future targets. So this system enables management to
take important decisions.

Skills Required for Participative Management

1. Interest and concern. Some people prefer to be told what to do.
2. Recognize and enhance talents in others. Some people fear they will lose
power if
they build others.
3. Recognize and work around weaknesses in others. Some people are so
by deficiencies of others that they can.t they can.t recognize and work with
4. Communication.particularly listening. We often would rather
inform than become informed.
5. Conflict resolution. It is easier to create a conflict than to
resolve one. It usually requires forgiving others.something
most people don.t do well.
6. Self-control. Getting the best out of others requires controlling
our selves.our habits, anger, self-serving tendencies.
7. Negotiation. It can seem difficult to negotiate when we
already have the power to simply decide and act.
8. Compromise. We often must compromise short-term personal or
departmental goal to achieve a company goal or help another achieve a
personal goal.
9. Synergy. The PM process relies on the belief that 1 + 1 = 3.
10. Teachability. When the team answer is different than our preconceived
desire we must
learn from the team.
11. Flexibility. We must learn from others and then implement the better
12. Correction. The PM process constantly makes it clear that, .I was
mistaken,. .I didn.t
think of everything,. .I wasn.t considering another.s viewpoint,. etc. Most
people don.t
like this process.

Transfer pricing is the setting of the price for goods and services sold between controlled (or
related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a
parent company, the cost of those goods is the transfer price. Legal entities considered under the
control of a single corporation include branches and companies that are wholly or majority owned
ultimately by the parent corporation. Certain jurisdictions consider entities to be under common

control if they share family members on their boards of directors. It can be used as a profit allocation
method to attribute a multinational corporation's net profit (or loss) before tax to countries where it
does business. Transfer pricing results in the setting of prices among divisions within an enterprise.
In principle a transfer price should match either what the seller would charge an independent, arm's
length customer, or what the buyer would pay an independent, arm's length supplier. While
unrealistic transfer prices do not affect the overall enterprise directly, they become a concern when
they are misused to lower profits in a division of an enterprise that is located in a country that levies
high taxes and raise profits in a country that is a tax haven that levies no or low taxes.[1] Transfer
pricing is the major tool for corporate tax avoidance.[2]

Responsibility of a Financial Controller

A financial controller -- sometimes called a "comptroller -- is the lead accounting executive in
a company. A controllers duties can vary depending upon the size of the company, the
complexity of accounting and financial operations and the number of people employed in
the accounting department. The controller provides financial leadership and is instrumental
in forming accounting strategies. A controller's role, especially in smaller companies, can
include broad visionary responsibilities as well as hands-on management.
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A financial controller is responsible for ensuring that all accounting allocations are
appropriately made and documented. In smaller companies, the controller may also perform
cash management functions and oversee accounts payable, accounts receivable, cash
disbursements, payroll and bank reconciliation functions. Every company should maintain a
separation of duties with regards to accounting functions to insure that there are checks and
balances in the system. For instance, if the controller is responsible for preparing cash
disbursements, he should not be a signatory on the account; the owner, chief executive or
chief financial officer should be required to sign all checks.

Internal Controls
A financial controller is responsible for establishing and executing internal controls over the
companys accounting and financial procedures. This includes reviewing and approving all
invoices to be paid, as well as reviewing accounts receivable aging reports. In smaller

companies, the controller will often handle collections on invoices, especially ones that are
45 days to 60 days overdue. A financial controller is also responsible for coordinating with
external tax accountants for income tax preparation and auditors who prepare internal
audits of the company. This includes keeping company records organized and readily
available for examination.
Related Reading: An Audit Firm's Responsibility About Weaknesses in Internal Control

Financial Planning and Reporting

Financial controllers in smaller companies are responsible for all banking and finance
activities. This includes negotiating lines of credit and vendor agreements, as well as
reviewing all financial contracts, financing agreements and insurance policies. She is also
responsible for providing accurate and comprehensive financial information to executive
management for long-term financial strategizing. Unless a company has a CFO to provide
the leadership for long-term financial planning, the controller will be required to fulfill this
responsibility as well. In any case, she must provide crucial financial data and work with
executive management to coordinate all financial planning functions with business
operations. Financial reporting duties include preparing financial statements, balance sheets,
cash flow reports, budgets, budget-to-actuals and financial projections.

Financial Analysis
In addition to financial reporting, a controller must be skilled at in-depth financial analysis
and providing expert financial perspective and opinions. This means that a financial
controller must be proficient in spreadsheet design that is often complex. While a CFO is
responsible for finalizing financial policy, a controllers financial analysis skills are
instrumental in helping to assess risk, analyze efficiency and inform policy decisions made
by executive management.

Types of Audits and Reviews:

Financial Audits or Reviews


Operational Audits


Department Reviews


Information Systems Audits


Integrated Audits


Investigative Audits or Reviews


Follow-up Audits

Financial Audit
A historically oriented, independent evaluation performed for the purpose of attesting to the fairness, accuracy, and
reliability of financial data. CSULB's external auditors, KPMG, perform this type of review. CSULB's Director of
Financial Reporting coordinates the work of these auditors on our campus.

Operational Audit
A future-oriented, systematic, and independent evaluation of organizational activities. Financial data may be used, but
the primary sources of evidence are the operational policies and achievements related to organizational objectives.
Internal controls and efficiencies may be evaluated during this type of review.

Department Review
A current period analysis of administrative functions, to evaluate the adequacy of controls, safeguarding of assets,
efficient use of resources, compliance with related laws, regulations and University policy and integrity of financial

Information Systems (IS) Audit

There are three basic kinds of IS Audits that may be performed:

General Controls Review

A review of the controls which govern the development, operation, maintenance, and security of application
systems in a particular environment. This type of audit might involve reviewing a data center, an operating
system, a security software tool, or processes and procedures (such as the procedure for controlling production
program changes), etc.


Application Controls Review

A review of controls for a specific application system. This would involve an examination of the controls over the
input, processing, and output of system data. Data communications issues, program and data security, system
change control, and data quality issues are also considered.


System Development Review

A review of the development of a new application system. This involves an evaluation of the development
process as well as the product. Consideration is also given to the general controls over a new application,
particularly if a new operating environment or technical platform will be used.

Integrated Audit
This is a combination of an operational audit, department review, and IS audit application controls review. This type of
review allows for a very comprehensive examination of a functional operation within the University.

Investigative Audit
This is an audit that takes place as a result of a report of unusual or suspicious activity on the part of an individual or
a department. It is usually focused on specific aspects of the work of a department or individual. All members of the
campus community are invited to report suspicions of improper activity to the Director of Internal Auditing Services on
a confidential basis. Her direct number is 562-985-4818.

Follow-up Audit
These are audits conducted approximately six months after an internal or external audit report has been issued. They
are designed to evaluate corrective action that has been taken on the audit issues reported in the original report.
When these follow-up audits are done on external auditors' reports, the results of the follow-up may be reported to
those external auditors.