The six steps in decision-making process are:
1. Define the problem
– This is the first step towards a decision-making procedure. Problem exists whenever a decision is being made.
2. Collecting the data
– In making the best decisions, managers need to have the ideal resources such as information, resources, and time available. Therefore, they need to collect all these data.
3. Identifying the alternatives
– Appropriate alternatives needs to be generated whenever the problem have been identified. This is to resolve the problem.
4. Specifying the criterion
– The main purpose of developing and specifying criteria is to evaluate alternatives and to select the best one to resolve the problem.
5. Developing a decision model
– Once the alternatives are developed, an action plan has to be developed. This is essentially for the implementation phase.
6. Making a decision
– The reason of making a decision is to fix a problem. The final test of any decision is whether or not the problem is being fixed. If the problem remains or has eventually become worse, the steps of the decision-making process need to be repeated until an acceptable resolution has been found.
The main purpose of “specifying the criterion” is to evaluate alternatives and to select the best one to resolve the problem while “developing a decision model” is an action plan that has to be developed or implementing the best alternatives which is essential for the implementation phase.
Management accountant usually involves in planning decisions and also control decision. Planning decisions focus on selecting organization goals, predicting results under various alternative ways of achieving those goals, deciding how to attain the desired goals and communicating the goals as well as how to attain them for the organization. Control decisions mainly focus on taking actions that may implement the planning decisions and deciding how to evaluate the performance as well as providing feedback.
Based on the elaboration above, we can conclude that management accountants involves heavily on “Specifying the criterion” since they need to predict the result under various alternatives ways and decide the best alternatives before implementing it.
If the managers detected another alternative at the last step when decision-making process is underway, the fourth, fifth and sixth step has to be revisited again in order to consider this new alternative. “Specifying the criterion” need to be revisited in order to develop and evaluate these new alternatives. In this step, they will choose the new best alternative for resolving the problems. After that, the fifth step which is “Developing a decision model” needs to be used for it is known as the essential implementation phase to develop an action plan. For the last step, “Making a decision”, they will look whether the problem is fixed or not.
Part 2 (i)
1) Distinguish between qualitative and quantitative characteristics.
Quantitative research focuses on numbers or quantities. Quantitative studies have results that are based on numeric analysis and statistics. Often, these studies have many participants. It is not unusual for there to be over a thousand people in a quantitative research study. It is ideal to have a large number of participants because this gives analysis more statistical power.
Qualitative research studies are focused on differences in quality, rather than differences in quantity. Results are in words or pictures rather than numbers. Qualitative studies usually have fewer participants than quantitative studies because the depth of the data collection does not allow for large numbers of participants.
Quantitative and qualitative studies both have strengths and weaknesses. A particular strength of quantitative research is that statistical analysis allows for generalization (to some extent) to others. A goal of quantitative research is to choose a sample that closely resembles the population. Qualitative research does not seek to choose samples that are representative of populations.
However, qualitative data does provide a depth and richness of data not possible with quantitative data. Although there are fewer participants, the researchers generally know more details about each participant. Quantitative researchers collect data on more participants, so it is not possible to have the depth and breadth of knowledge about each.
Quantitative analysis allows researchers to test specific hypotheses. Depending on research findings, hypotheses are either supported or not supported. Qualitative analysis is usually for more exploratory purposes. Researchers are typically open to allowing the data to take them in different directions. Because qualitative research is more open to different interpretations, qualitative researchers may be more prone to accusations of bias and personal subjectivity.
An example of qualitative research, Joe wants to study the coming out processes of gays and lesbians in rural settings. He doesn’t feel that the process can be well-represented by having participants fill out questionnaires with closed-ended (multiple choice) questions. He knows it’s a complex process, and he’d like to get information from not only gays and lesbians but from their families and friends. He doesn’t have the time or money to explore the lives of hundreds of participants, so he chooses five gays and lesbians who he thinks have interesting stories. He conducts a series of interviews with each participant. He then asks them all to identify three family members or friends, and Joe interviews them as well.
An example of quantitative, Stephanie is interested in the types of birth control that college students use most frequently at her university. She sends an email-based survey to a randomly selected group of 500 students. About 400 respond to the survey. They go to a website to fill out the survey, which takes about 5-10 minutes. The data is compiled in a database. Stephanie runs statistical analysis to determine the most popular types of birth control.
Part 2 (ii)
Decision making can be regarded as an outcome of mental processes leading to the selection of a course of action among several alternatives. Every decision making process produces a final choice. The output can be an action or an opinion of choice. However, the process of decision-making is not as easy as it sounds. The process of decision making however, can be made less cumbersome by following the six step decision making process. The six step decision making process is a rational decision making process. This means that it is based upon thinking about, comparing and evaluating various alternatives. Rational decision making models are typically described as linear, sequential processes.
The steps are:
1) Define the situation and the desired outcome
2) Develop Alternatives 3) Evaluate the Alternatives 4) Make a decision
5) Implement the Solution 6) Evaluate results
At what point in the six-step decision-making process do the qualitative characteristics have an impact?
The qualitative characteristics will have an impact during the ‘evaluate the alternatives’ and ‘make a decision step’; the word qualitative refers to descriptions or distinctions based on some quality or characteristic rather than on some quantity or measured value. It can be a form of analysis that yields the identity of a compound. In evaluating the alternatives, you have to find out the advantages and disadvantages of each option. This can be done as per the research you have done on that particular alternative. At this stage, you can also filter out the options that you think are impossible or do not serve your purpose. Rating each option with qualitative characteristic would also help in the filtration process. Thus in making the decision, we have to consider the qualitative characteristic that an alternatives have, how much an alternative is better in quality than another.
One characteristic of information that is essential in order for the information to be useful for decision making is relevance. What are the other two characteristics?
The other two characteristics would be accuracy and timeliness. Accuracy in the general statistical sense denotes the closeness of computations or estimates to the exact or true values. Accuracy has two requirements which are it must be the right value and it must represent the value in a consistent form with all other representation of the same value.
Timeliness refers to the time between the release date of data and the target date when it should have been delivered. Timeliness of information reflects the length of time between its availability and the event or phenomenon it describes. Information timeliness goes hand in hand with information accuracy. The concept of what is timely is itself constantly changing and being redefined due to changes in customer perception caused by technology and the competitive environment.
Frequently there is a conflict between the two characteristics requested in Question (i), describe why this conflict exists.
It has long been recognized that a trade-off exists between accuracy of real-time methods, and their timeliness. The conflict arise from the dynamically changing status of information sources, the diverse user requirements in terms of data accuracy and service latency, and constant change in the system conditions. Considering these dynamics and focusing on addressing the trade-offs between timeliness, accuracy, and also cost for information collection in distributed real-time environments. The uncertainties surrounding the determination of current cost are considerable and variations among estimates of their magnitude can be expected
Part 3 (iii)
Relevant information is the predicted future costs and revenue that will differ among the alternatives. In order to qualify for relevancy, the information must meet two criteria. First is that the information must be an expected revenue or costs. Second is that it must have an element of difference among the alternatives. However, irrelevant information are information which cannot be changed with any future decisions. Example of irrelevant information is sunk cost. All sunk cost are irrelevant since they will be the same for any alternatives
There are four types of relevant information. Those four are:
i) Opportunity cost
– Opportunity cost is cost of an alternative that must be forgone in order to pursue a further action.
ii) Sunk cost
– Sunk cost is cost that have already incurred. They are costs which cannot be changed and do not affect any future cost.
iii) Differential cost
– A differential cost is the difference in cost items of two or more decision alternatives specifically in two different situations. However, when there are same item with the same amount appears in all alternatives, it is consider as irrelevant information.
iv) Incremental cost
– Incremental cost is the overall change that a company experiences by producing one additional unit of goods
As a conclusion, as what been mentioned above on the second criteria to determine relevancy, relevant information must have an element of difference among the alternatives. Irrelevant information however does not follow those criteria. Information, for example costs, which is identical in all decisions are irrelevant information.