Five Steps
The five steps are: (1) define the decision task, (2) identify alternative courses of action, (3) collect relevant information and evaluate each alternative, (4) select the preferred course of action, and (5) analyze and assess decisions made.
Nonfinancial information is relevant to decision making because it includes information about such matters as environmental considerations and social responsibility. These issues can have a great effect on a business.
A relevant cost is a cost that differs between two alternatives in a decision making process. Relevant costs include out of pocket costs and opportunity costs.
Sunk costs are irrelevant because they remain the same whether the product is sold in its present condition or processed further.
An out-of-pocket cost requires a current outlay of cash. Yes, out-of-pocket costs are recorded in the accounting records.
An opportunity cost is the potential benefit that is lost by choosing an alternative course of action. Opportunity costs are not recorded in the accounting records
Some qualitative factors that should be considered in decision making depend on the decision to be made. For instance in a make or buy decision, factors such as quality, delivery time, potential employee layoffs, and reduction in employee morale must be considered. In a special order decision, the company must decide whether the special order is truly a one-time only deal, and whether the company can continue to offer the low price in the long run. Other decisions require the use of other qualitative factors.
There are virtually no incremental costs associated with shipping the additional iPod. The company’s employees would not receive any additional compensation for handling one additional item, no ground transportation costs would be incurred for picking it up at the sender’s location, additional fuel costs