Historical cost Model Meaning, Advantages and Limitations

The sum total of all the costs related to human resources is calculated to find out the value of a human resource. These costs include the cost of recruitment, selection, training, placement, and development of human resources of an organization.

Historical Cost Method was introduced by Brummet, Flamholtz and Pyle. This is the oldest method of valuation of human resource.

If the human assets are liquidated prematurely, the whole of the amount not written off is charged to the income of the year in which such liquidation takes place. If the useful life is recognized to be longer than originally expected, revisions are affected in the amortization schedule.

When a firm recruits an employee, 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 development are also capitalized and is amortized over the remaining life. The unexpired value is an investment in human assets.

The historical cost of human resources is very similar to the book value of the other physical assets.

Types of Historical Cost Method

Acquisition cost: It means the cost which is incurred on acquiring the human resource in the organization. The cost incurred at the time of recruitment, selection, and placement, etc.

Learning Cost: It means that cost is incurred at the time of providing training and development to the employees and managers.

Advantage of historical cost method

• Employers and employees can easily understand this method.
• This method follows the traditional accounting concept of matching costs with revenue.
• This method is very easy to calculate the value of a human resource.
• Return on the company’s investment in human resources can easily be calculated by this method.

Disadvantage of historical cost method

• In this method rate of amortization is very difficult to determine.
• Under this method it is very different to estimate the service period of an employee.
• As we know, the value of assets decreases with an increasing number of years or amortization. But in the case of human resources, it is just the opposite. The utility of employees increases with the increasing experience and training provided to them.