© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 1

CHAPTER 10 Human Resource Decisions © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 2

Learning Objectives Which costs should be included in the cost of labour of an organization? Why is it not necessarily correct to assume that labour costs associated with the production of a good or service are variable? Which relevant labour costs should be included in decision making? What are options for reducing labour costs, other than layoffs? What are the costs associated with redundancy programs? How can an organization measure the effectiveness of human capital? © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 3

4 Human Resources and Accounting Personnel management (human resources) is a function concerned with  job design  recruitment, training, and motivation  performance appraisal  industrial relations, employee participation, and teamwork  remuneration  redundancy  health and safety  employment policies and practices

© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 5 Human Resources and Accounting It is through human resources that the production of goods and services takes place In accounting terms, people are treated as labour: a resource that is consumed - therefore an expense rather than an asset - either directly in producing goods or services, or indirectly as a business overhead Human resources are truly an asset but the conservatism of accounting prevents human capital as being reported as such

© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 6 The Cost of Labour The salary or wage paid to the employee, plus any benefits. The benefits consist of the non-salary or wage costs that follow from the payment of salaries or wages Total employment cost may also include  Bonuses  Profit shares  Non-cash remuneration  Stock options  Health benefits - dental and medical insurance  Pension contributions, expense allowances, business- provided motor vehicles

© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 7 The Cost of Labour

© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 8 Example: Employment Cost

© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 9 Example: Employment Cost Assuming a 5-day workweek, 20 days of holiday leave, 5 days of sick leave and 8 public holidays per year, the actual days at work (the production capacity) is The total employment cost per working day for this employee is therefore $ ($39,141/227 days). Assuming that the employee works eight hours per day and is productive for 80% of the time at work, then the cost per hour worked is $26.94 ($172.43/[8 80%])

Cost per Unit of Production In companies that manufacture a product or provide a service, the labour cost to make each unit of product or to provide each service transaction is a direct cost that is important in determining the cost of production of the product or service From the example in slide #9 in productive hours the employee completes four units of a product, the direct labour cost per unit of production is $6.74 ($26.94/4). If the example in slide #9 related to a service company and the service employee processes five transactions per hour, the direct labour cost per unit of production (a transaction is still a unit of production) is $5.39 ($26.94/5). © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 10

Variability in Labour Accountants have historically considered labour that is consumed in producing goods or services as a variable cost This concept of labour as a cost per service provided or per product produced is commonly used across many industries Most companies cannot change their labour costs dramatically over the short term Many businesses today account for labour related to production of products or services as a fixed cost © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 11

© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch Relevant Cost of Labour The future, incremental cash flow that will result from making a particular decision Opportunity cost is the loss from an opportunity foregone Relevant costs may change over time and with changing circumstances

© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch Relevant Cost of Labour Estimated workloads and labour costs for a project are Relevant cost of labour to be used when considering this project can be calculated by considering the future, incremental cash flows Non-relevant costing approach

Outsourcing Labour Costs Whether current labour costs can be avoided if a company chooses to outsource will depend on a number of factors. One factor that must be considered is the length of the decision to outsource It is important in any calculation of relevant costs to be sure about which costs are avoidable and which costs are unavoidable Non-financial factors that must be considered when an organization is deciding to outsource a service  Quality  Privacy and security  Ethical issues  Importance © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 14

© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch Cost of Redundancy One of the first business responses to a downturn in profits is to make staff redundant Although the redundancy payments will be recognised as a business cost, there are less tangible costs, not reflected in the financial reports of a business  Loss of employee knowledge, skills, and experience  Costs related to low morale on the part of other employees  Decline in employee efficiency This short-term concern with reducing labour cost often ignores the potential for cost improvement  Activity-based costing  Cost of quality improvements  Improvements to capacity utilization

Measuring Human Capital © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 16

Conclusions Using accounting to help make human resource decisions  Cost of labour  Relevant cost of labour  Variability of labour and the costs of redundancy  Outsourcing labour costs  Measuring human capital © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 10 17