HUMAN RESOURCE ACCOUNTING AND CORPORATE PROFITABILITY: A STUDY OF QUOTED MANUFACTURING ORGANIZATIONS IN NIGERIA
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HUMAN RESOURCE ACCOUNTING AND CORPORATE
PROFITABILITY: A STUDY OF QUOTED MANUFACTURING ORGANIZATIONS IN NIGERIA
TABLE
OF CONTENT
Title Page i
Certificate Page ii
Approval Page iii
Dedication iv
Acknowledgement v
Table of Contents vi
List of Tables vii
Abstract viii
CHAPTER
ONE; INTRODUCTION
1.1 Background
of the Study 1
1.2 Statement
of the Petroleum 6
1.3 Purpose
of the Study 9
1.4 Research
Questions 10
1.5 Research
Hypothesis 10
1.6 Significance
of the Study 11
1.7 Scope
and Limitation of the Study 11
1.8 Conceptual
Definition of Terms 12
1.9 Organization
of the Study 14
CHAPTER
TWO: REVIEW OF RELATED LITERATURE
2.1 Introduction 17
2.2 Theoretical
Framework 17
2.3 Concept
of Corporate Profitability 22
2.4 Employee
Acquisition Costs and Profitability 25
2.5 Employee
Replacement Costs and Profitability 28
2.6 Employee
Separation Costs and profitability 30
2.7 Human
Resource Link to Profitability 33
2.8 Human
Resource and Corporate Profitability 36
2.9 Behavioural
Model 39
2.10 Profit Margin 42
2.11 Gross Profit Margin 43
2.13 Net Profit Margin 45
2.13 Summary 47
CHAPTER
THREE: METHODOLOGY
3.1 Introduction 51
3.2 Research
Design 51
3.3 Population
and Sampling Procedure 52
3.4 Data
Collection Method 52
3.5 Reliability
of Research Instrument 53
3.6 Validity
of Research Instrument 54
3.7 Measurement
of Study Variables 59
3.8 Method
of Data Analysis 62
CHAPTER
FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Introduction 64
4.2 Descriptive
Statistics 64
4.3 Testing
of Hypothesis 69
4.3.1 Hypothesis 1 70
4.3.2 Hypothesis 2 72
4.3.3 Hypothesis 3 75
4.3.4 Hypothesis
4 77
CHAPTER
FIVE: DISCUSSION OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1 Discussion
of Findings 81
5.2 Implication
of Findings 86
5.3 Conclusion 87
5.4 Recommendations
88
5.5 Suggestions
for further studies 91
5.6 Contribution
to knowledge 94
Bibliography
Appendices
LIST
OF TABLES
Table 1: Measurement of HRA Variables 57
Table 2: Employees’ acquisition cost index 65
Table 3: Employees’ Replacement cost index 65
Table 4: Employees’ Separation costs index 66
Table 5: Employees’ acquisition costs (2007-2011) 66
Table 6: Employees; replacement costs (2007-2011) 67
Table 7: Employees’ separation cost (2007-2011) 67
Table 8: descriptive statistics on the major
variable of the study 68
Table 9: Sample composition of return on asset
(2007-2011) 68
Table 10: Sample composition of return on equity
(2007-2011) 69
Table 11: correlation analysis showing the
Relationship between employee’
acquisition cost and
gross
profit margin 70
Table 12: Correlation analysis showing the relationship
Between employees replacement cost and
gross profit
Margin 73
Table 13: Correlation analysis showing the relationship
Between separation cost and gross
profit margin 75
Table 14: correlation analysis showing the relationship
Between the variables of the study 77
ABSTRACT
This
study examines the relationship between human resource accounting costs and
corporate profitability of manufacturing organizations (10 selected companies)
during a period of 5 years. We tested to ascertain whether human resource
variables are significant determinants of corporate profitability. We
correlated 3 human resource variables as well as all the variables of the study
in Cascio’s behavioural model. We found that (1) acquisition and separation
costs are positively associated with gross profit margin (2) replacement cost
is negatively associated with net profit margin. Consequently the study
revealed that all the variables of the study are significant at 0.05 and 0.01
levels. However, there is implication that concentration on replacement costing
may not enhance returns. While embarking on certain job enrichment programmes
will increase the efficiency and effectiveness of employees which can also be
utilized as a benchmark measurement for inter-company comparison in the same
industry. Consequently the findings of our study suggest beside other
recommendations that adopting the Cascio’s behavioural costing model which
considers all the characteristics of human resources will yield desired result.
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND
OF THE STUDY
The
major objective of every business is to earn profit. Pandey, (20120) emphasizes
that a company should earn profit to Survive and grow over a long period of
time. Profit are essential, it is a fact that sufficient profit must be earned
to sustain the operations of the business to be able to obtain funds from
investors for expansion and growth and to contribute towards the social over
heads for the welfare of society. Profits are the difference between revenue
and expenses over a period of time (usually one year). Profit is the ultimate
“output of a company and it will have no future if it fails to make sufficient
profits. Therefore, the financial manager continually evaluates the efficiency
of the company in term of profit. The profitability ratios are calculated to
measure the efficiency of the company, creditors and owners are also interested
in the profitability of the firms. Creditors want to get interest and repayment
of principal regularly. Owners want to get a required rate of return on their
investment. This is possible only when the company earns profit. Corporate
profit represents the portion of the total income earned from current
production that is accounted for by corporation. The estimate of corporate
profit are an integral part of the national income and produce (NIP) that
provides a logical and consistent framework for presenting statistics on
economic activity. Andrew et al, (2011). Corporate profits is one of the most
closely watch financial indicators. Profitability provides a summary measure of
corporate financial health and this serves as an essential indicator of
financial performance. Profits are a source of retained earnings providing much
of the funding capital investments that raise productive capacity. The estimate
of profits and of related measures may also be used to evaluate the effects on
corporate of changes in policy or economic conditions. Robert et al (2001).
The
biggest barrier to profitability is ignorance by many people about how the
company makes money and how, it achieves its objectives, and all of the sales
interdependent on each other. In today’s business environment profitable
organization problems using multi-disciplinary teams.
The
concept of Human Resource (HR) as a Profitability contributor is fast gaining
currency in global businesses and bears closer examination. Professor David
Ulrich of the University of Michigan a leading expert on HR competency Models,
sees the changing business world as 20-20-60 Proposition. 20% of executive
surveyed currently use HR as active and innovative business solution partners.
20% believe that HR should remain as administrative overhead and only perform
transactional work. It’s the 60% who are starting to expect HR to partner with
other departments to improve the company’s core competencies and competitive
advantages. And more HR people are stepping up to the plate and delivering the
goods.
What
is driving this thinking? The Short Answer is completive pressure in a fast
changing business world- pressure for sales, talent, and profits. Most (CEO’S
and their CFO’S) are held accountable for three general but powerful results.
Increasing revenue, generating cash, and reducing costs. In order to focus on
these three accountabilities paradigms that no longer work are being discarded
as companies seek to stay in and grow their business. HR as a strictly
administrative overhead and resource consumer is one of the paradigm under
justifiable attack. Transactional HR activities such as payroll benefits and
administration and record keeping should be with significant cost savings. To
many CEO’S and CFO’S, HR as a revenue enhancer takes some getting used to.
That’s not the way they were taught. They are more interested in the payoff and
are asking appropriate questions. What’s in it for the company? Where is the
improvement in the revenue stream? Once they get solid answer to these
questions from competent HR leaders, the CEO’S are quick to change their
thinking. Hence an adequate human resource accounting would definitely impact
on the corporate profitability of the firm. The extents to which an
organization can practice human, asset accounting treatments have strong
relationship with its profitability. As pointed out by chin and Lin (2002), a
company can actually “loose its competitive edge when making cost reduction
decision by cutting down on human asset investment instead of human assets
expenses”.
Some
empirical studies have been carried out on Human Resource Accounting and
Corporate Profitability. Delaney and Huslid, (1996) in their study, classified
Capitalized Human Resource cost into acquisition and development cost found
that human resources management practices are related to the development of the
Human Resources of the Firm. Becker and Gerhard (1996); Guest (1997); Becker
and Huslid, (1998) also in their studies on HRM and firm performance conducted
in other geographical settings separately found that Human Resources cost have
an economically and statistically significant impact on turnover and Corporate
Productivity. Chen and Lin (2002) also
in their Study, the Role of Human Capital Cost in Accounting found that Human
Asset Investment is an Input made by Company in Talents and Technology that
benefits Competitive Advantages are valuable and unique, and which should be
kept out of reach of other companies. Shalinis and Shulda, (2010) examined the
application of Human Resource Accounting in Heavy Industries to determine the
value of production per employee is increasing from 2001-02 to 2009-10. And the
manpower is decreasing from 2001-02 to 2009-10 due to retirement. However,
these studies are not concentrated on the value of Human Resource Accounting to
Corporate Profitability.
This
Study Examine Human Resource Accounting and the Level of Profitability of
Listed Manufacturing Firm in Nigeria.
1.2
STATEMENT
OF THE PROBLEM
In
His contribution to the Objectives of Business Organization Dinayak Shenoy assert
that every business is started to earn Profit as it is essential for survival
and growth of business enterprise. According to him, profit earning should be
regarded as the main objective of units. The need of profit in a business is
left to cover the cost of production and also create a surplus for undertaking
expansion and diversification work. The survival of the business will be
day-dreaming affairs in the absence of profit. Because of the importance of
profit to business it has been rightly told that profit can be no more than the
objective of a Business that eating is to the objective of living. Stephen Carter also argued that high
corporate profit are a good thing, and pursuit’ of high profits is what
motivate competition. Therefore follows that a company that has high profits
over ad sustained period is simply exceptional at are a good thing, and
‘pursuit’ of high profits is what motivate competition. It therefore follows
that a company that has high profits over a sustained period is simply exceptional
is innovating ahead of the competition for years on end.
People
and the Bottom line, an in-depth two-year study by the work foundation and the
institute for Employment Studies, tested a range of people management practices
with almost 3,000 employees to assess their impact on organizational
performance. It found that businesses with good HR Practices-from resourcing to
employee engagement and skills development, enjoyed higher Profit Margins and
Productivity than those without. The study concluded that if an organization
increased its investment in HR by just 10% it would boost gross profits by
$1,500 per employee per year. The pertinent question to ask this juncture
therefore is how does the company make money? How does it achieve its
objectives? And how are all of the silos interdependent on each other? Today’s
business environment demands therefore that profitable organizations possess
highly skilled employees who can solve problems using multi- disciplinary
terms.
A
number of studies have investigated human resource accounting and firms
profitability e.g. MacDuffie, (1995); Koch and McGrath, (1996); Kodwani and
Tiwari; (2007), Scholz et al, (2008) but none of these studies adopted the
Casio’s behavioral Human Resource Cost Approach. In Nigeria few studies have
emerged on Human Resource Accounting and Firms Financial Performance. Okpala
and Chidi., (2002) observed that the quality of human Capital is a Major Factor
in determining the value of firm’s Stock and Investment Decision in Nigeria.
Bassey and Artizeh, (2012) also observed that capitalized Human Resource and
its influence on Corporate Productivity Provides relatively strong support for
the existence of a positive relationship between human resources cost and the
performance of Nigerian Corporations.
Micah
et al, (2012) focused on firm’s financial performance and human resources
accounting disclosure and found that there is positive correlation disclosure
which supports that an increase in return on equity encourages firm in
reporting human capital information so as to Establish trustworthiness with
shareholders, enhance external reputation so as to establish legitimacy in
Nigeria Financial Markets.
However,
none of these studies has empirically examined the association between human
resource accounting and Corporate Profitability in Nigeria using Cascio’s
behavioural costing Model hence this study. Consequently, the study seeks to
fill a gap in the existing literature by examining the relationship between
human resources accounting and profitability of manufacturing firms in Nigeria
Stock Exchange.
1.3
PURPOSE
OF THE STUDY
The
main Purpose of this study is to determine the level of association between
human resource accounting and profitability of quoted manufacturing
organizations in Nigeria. Specifically, the study aims at achieving the
following.
1. To
determine the relationship between acquisition cost and gross profit margin.
2. To
examine the extent to which employees’ replacement cost relates to net profit
margin.
3. To
evaluate the rate at which employees separation cost relates to gross profit
margin.
4. To
examine the relationship between human resource accounting costs and Corporate
Profitability.
1.4 RESEARCH
QUESTIONS
Based
on the objective of the study, the following questions are raised to guide
study.
1. What
is the relationship between employees acquisition cost and gross profit margin?
2. To
what extent is employees’ replacement cost associated with net profit margin?
3. what
is the relationship between employees’ separation cost and gross profit margin?
4. To
what extent do human resource accounting costs relate to corporate
profitability?
1.5 RESEARCH
HYPOTHESIS
The
following null Hypotheses are postulated
H01: Employees’ acquisition
cost does not significantly relate to gross profit margin.
H02: Employees’
replacement cost does not significantly relate to net profit margin.
H03: Employees’ separation
cost does not significantly relate to gross profit margin.
H04: Human resource accounting cost does not
significantly relate to corporate profitability.
1.6 SIGNIFICANCE
OF THE STUDY
The
findings of the study will aid potential and existing creditors and
share-holders on how to ascertain profitability especially in terms of gross
profit margin and net profit margin. It will assist analysts of financial
statement for quality profitability information. It will enable government,
policy makers, management; students of business schools and other users of
financial statements ascertain extent of relationship of human resource
accounting and profitability and its implication on corporate profitability in
Nigeria.
Finally,
it will add to existing body of knowledge in human resource accounting and the
finding will stimulate further research in this area of study to enhance the
profitability of manufacturing firms in Nigeria
1.7 SCOPE
AND LIMITATION OF THE STUDY
This
study was restricted to a number of factors.
1. Scope of the Study: The scope of this
study is one of the limitations of the study. The geographical scope of the
study covers only listed manufacturing firms in Nigeria.
2. Challenges
in obtaining data from published financial statement from the Nigeria Stock
Exchange. Consequently, available data on the studied companies was limited to
a period of five years.
3. Finally
due to the fact that this research is an academic study money and time
constrain also a limiting factor.
1.8 CONCEPTUAL
DEFINITION OF TERMS
Ø Human Resources:
This is the sum total of the employee of an organization or its’ workforce.
Ø Human Resource Accounting:
It is the process of identifying the human resource of an organization,
quantifying them in the monetary terms and shows them on the balance sheet.
Ø Human Resource Management:
Consists of the policies, practices and system of an organization that
influences employees’ behaviours, attitudes and performance.
Ø Human Resource:
Is that part of an organization’s capital represented by the ability, experience,
training and skill of its workforce or employee.
Ø Cost:
Cost means a sacrifice forgone or the giving up of something to acquire
another, usually measured in monetary terms.
Ø Corporate Profitability:
This refers to the progress expressed in monetary terms which a firm has made
over the use of her resource and usually shown or reported in financial
statements.
Ø Financial Indicators:
These are measures or indices put in place to ascertain the extent of firms
financial performance such as gross profit Margin net Profit Margin.
Ø Financial Markets:
This refers to market where short term financial instruments are traded on.
Ø Gross Profit Margin:
This refers to sales minus cost of goods sold over sales.
Ø Net Profit Margin:
This refers to profit after tax over sales.
Ø Creditors:
Those who make funds and other business resources available to the business
firm in expectation of returns.
Ø Balance Sheet:
Is a statement of the total assets and liabilities of an organization at a
particular date.
Ø Profit and Loss Account:
This is an income statement that shows the revenue generated by a business firm
over cost or expenses incurred in a particular period.
1.9 ORGANIZATION OF THE STUDY
This
study was organized into five chapters. The first chapter provides a general
introduction to the study. In this research, hypothesis, scope and limitation
of the study, significance of the study and conceptual definitions of terms are
examined.
Chapter
two focused on a review of related literature where issues such as theoretical
framework concept of corporate profitability as well as other conceptual
variable adopted in the study were discussed.
Chapter
three examined the research methodology to be adopted in the study. This
include research design, population sampling procedure and data collection
method, operational measures and data analysis.
Chapter
four concentrates on the analysis of data and tests of hypothesis while chapter
five provides discussion of findings that emerged from the analysis of data,
conclusion, and recommendations, suggestions for further studies and
contributions to knowledge.
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