1. Clarify the decision problem. Sometimes the decision to be made is clear. Forexample, if a company receives a special order for its product at a price belowthe usual price, the decision problem is to accept or reject the order. But thedecision problem is seldom so clear and unambiguous. Perhaps demand fora company’s most popular product is declining. What exactly is causing thisproblem? Increasing competition? Declining quality control? A new alternativeproduct on the market? Before a decision can be made, the problem needs to beclarified and defined in more specific terms. Considerable managerial skill isrequired to define a decision problem in terms that can be addressed effectively.2. Specify the criterion. Once a decision problem has been clarified, themanager should specify the criterion upon which a decision will be made.Is the objective to maximize profit, increase market share, minimize cost, orimprove public service? Sometimes the objectives are in conflict, as in adecision problem where production cost is to be minimized but productquality must be maintained. In such cases, one objective is specified as thedecision criterion—for example, cost minimization. The other objective isestablished as a constraint—for example, product quality must not be worsethan one defective part in 1,000 manufactured units.3. Identify the alternatives. A decision involves selecting between two or morealternatives. If a machine breaks down, what are the alternative courses ofaction? The machine can be repaired or replaced, or a replacement can beleased. But perhaps repair will turn out to be more costly than replacement.Determining the possible alternatives is a critical step in the decision process.4. Develop a decision model. A decision model is a simplified representation of thechoice problem. Unnecessary details are stripped away, and the most importantelements of the problem are highlighted. Thus, the decision model brings togetherthe elements listed above: the criterion, the constraints, and the alternatives.5. Collect the data. Although the managerial accountant often is involved in steps 1through 4, he or she is chiefly responsible for step 5. Selecting data pertinentto decisions is one of the managerial accountant’s most important roles in anorganization.6. Select an alternative. Once the decision model is formulated and the pertinentdata are collected, the appropriate manager makes a decision.7. Evaluate decision effectiveness. After a decision has been implemented, the resultsof the decision are evaluated with the objective of improving future decisions.

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