5-Step Critical Thinking Decision-Making Process Matrix
Step 1: Identify the problem(s) and uncertainties.
What exactly is the problem...
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(Study the problem to clarify what you need to know to solve it. Distinguish problems over which you have some control from problems over which you have no control. Pay special attention to controversial issues in which it is essential to consider multiple points of view.)
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The problem is this ...
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(Write out the problem clearly and precisely, with details. Write the problem in different ways until you get it perfectly clear in your mind.)
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This is an important problem because...
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(Remember in business, a problem is important if it affects the bottom line. So how does this problem affect the bottom line (net income).
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The key question(s) that needs to be answered to solve this problem is...
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(Every problem has questions connected to it. Here we want you to write out the most important question(s) you need to answer to solve the problem. State it clearly and precisely. Being specific is very important.)
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Step 2: Obtain information.
The following information is needed to answer this question...
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(Here you are looking for the facts and/or data that help you solve the problem. Actively seek the information most relevant to the question. Include in that information options for action, both short-term and long-term. Recognize limitations in the terms of resources such as money, time, and people.)
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Some important assumptions I am using in my thinking are...
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(Figure out what you are taking for granted. Make sure these assumptions are reasonable. Watch out for self - serving or unjustified assumptions.)
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The points of view relevant to this problem belong to...
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(Who are your stakeholders?Determine whether the stakeholder's point of view isrelevant.)
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Note: Remember to view the information you have obtained for potential bias. This is from the perspective of your own bias to the research and the bias of the authors who compiled the data andthe research you gathered. In other words, do not discount the importance of other's data because of your own bias(is).
Step 3: Make predictions about the future.
If this problem gets solved, some important implications are...
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(Evaluate options, taking into account the advantages and disadvantages of possible decisions before acting. What consequences are likely to follow from this or that decision?)
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If this problem does not get solved, some important implications are...
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(Evaluate options, taking into account the advantages and disadvantages of possible decisions before acting. What consequences are likely to follow from this or that decision?)
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The potential alternative solutions to solve the problem are...
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(If the problem involves multiple conflicting points of view, you will have to assess which solution is the best.)
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Note: if the problem is one-dimensional, there may be just one correct solution.
Step 4: Make decisions by choosing among alternatives.
What is the best solution and why...
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(After following the process above, I think the best solution to the problem is... Defend your recommendation.)
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Step 5: Implement the decision, evaluate performance, and learn.
Inbusiness, the fifth step in the decision making process is implementation. In the MBA program, most times you will end with Step 4 since you will not have the opportunity to implement. You may be asked to develop an implementation plan and recommend how you will evaluate performance in some assignments.
Activity-based costing cost hierarchy.
Action Items
1. Read the Problem below:
1. Activity-based costing, activity-based management merchandising. Super Bookstore (SB) is a large city bookstore that sells books and music CDs, and has a café. SB operates at capacity and allocates selling, general and administration (S, G & A) costs to each product line using the cost of merchandise of each product line. SB wants to optimize the pricing and cost management of each product line. SB is wondering if its accounting system is providing it with the best information for making such decisions.
Super Bookstore incurs the following Selling General & Administration costs:
Questions:
1-Suppose Super bookstore uses cost of merchandise to allocate all S, G & A costs. Prepare product line and total company income statements.
2. Identify an improved method for allocating costs to the three product lines. Explain. Use the method for allocating S, G & A costs that you propose to prepare new product line and total company income statements. Compare your results to the results in requirement 1.
3. Write a memo to Super Bookstore's management describing the state of its accounting system, any improvements that you would recommend, and how the information may be useful for product line decisions.
2. Fill out all the information required for 5-step critical-thinking decision-making matrix. As following :
Step 1: Identify the problem(s) and uncertainties based on the assigned problem.
Step 2: Obtaining Information on the matrix form the template worksheet below.
Step 3: Make predictions about the future on the matrix.
Step 4: Make decisions by choosing among the alternatives on the matrix.
Step 5: Implement the decision, evaluate performance, and learn.
#-3-Write a one-page analysis brief single spaces 12 front, times new roman, that should incorporate all of following instructions:
Case Background: You work for an outside consultant hired by the company. The partner (i.e., your instructor) has asked you to provide an analysis of this problem and make a recommendation; therefore, you will address the brief to your instructor.
a. An opening paragraph briefly introducing the case situation.
Note: The first half of the opening paragraph is to provide a synopsis of the company. The second half of the opening paragraph is state the problem (From Step 1 of the matrix).
b. Analysis header - The analytical section should be based on your personal assessment of the financial results from the worksheet. Develop your analysis using percentages and/or relevant dollar totals/balances. This section has the highest point value and should address the following:
i. Are there significant cost differences between the old allocation method and the ABC method for any of the product lines and why?
Note: Avoid the inclusion of calculations and/or explaining computations; instead refer to Appendix A. Avoid duplicating information within this section. The information for this section of brief should be derived from Steps 2 and 3 of the matrix.
c. Conclusion header - This section should include your opinion based on your analysis of the case information and situation outcome. Your recommendation should address the following question and provide only key relevant information and logical discussion in support of your opinion:
i. Based solely on the worksheet information (Appendix A), should the bookstore adopt the ABC method? (From Step 4 of the matrix)
Template worksheet
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Super Bookstore
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Income Statement
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For the Year Ended 31 December, 2010
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Books
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CDs
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Café
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Total
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Revenues
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$3,720,480
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$2,315,360
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$736,216
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$6,772,056
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Cost of Merchandise
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2,656,727
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1,722,311
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556,685
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4,935,723
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Cost of Café Cleaning
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18,250
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18,250
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Allocated Selling, General and Administration Costsa
(0.300986 × $2,656,727; $1,722,311; $556,685)
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799,638
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518,392
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167,554
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1,485,584
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Operating income
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mce_markernbsp; 264,115
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mce_markernbsp; 74,657
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mce_markernbsp; (6,273)
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mce_markernbsp; 332,499
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aOverhead rate = $1,485,584 ÷ $4,935,723 = 0.300986 per cost of merchandise dollar
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2-Identify an improved method for allocating costs to the three product lines. Explain. Use the method for allocating S, G & A costs that you propose to prepare new product line and total company income statements. Compare your results to the results in requirement?
Selling, general and administration (S,G& A) is comprised of a variety of costs that are unlikely to be consumed uniformly across product lines based on the cost of merchandise. Super Bookstore should consider an activity-based costing system to clarify how each product line uses these S, G & A resources.
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Books
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CDs
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Café
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Total
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Number of purchase orders
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2,800
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2,500
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2,000
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7,300
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Number of deliveries received
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1,400
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1,700
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1,600
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4,700
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Hours of shelf-stocking time
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15,000
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14,000
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10,000
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39,000
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Items sold
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124,016
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115,768
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368,108
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607,892
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Purchasing
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$474,500 ÷ 7,300 orders placed = $65 per purchase order
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Receiving
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$432,400 ÷ 4,700 deliveries = $92 per delivery
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Stocking
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$487,500 ÷ 39,000 hours = $12.50 per stocking hour
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Customer support
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$91, 184 ÷ 607,892 items sold = $0.15 per item sold
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Books
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CDs
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Café
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Total
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Revenues
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$3,720,480
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$2,315,360
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$736,216
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$6,772,056
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Cost of Merchandise
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2,656,727
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1,722,311
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556,685
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4,935,723
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Gross margin
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1,063,753
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593,049
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179,531
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1,836,333
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Cost of Café Cleaning
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18,250
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18,250
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Purchasing
($65 × 2,800; 2,500; 2,000)
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182,000
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162,500
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130,000
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474,500
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Receiving
($92 × 1,400; 1,700; 1,600)
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128,800
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156,400
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147,200
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432,400
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Shelf-stocking
($12.50 × 15,000; 14,000; 10,000)
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187,500
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175,000
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125,000
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487,500
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Customer support
($0.15 × 124,016; 115,768; 368,108
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18,603
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17,365
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55,216
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91,184
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Total S, G & A costs
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516,903
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511,265
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475,666
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1,503,834
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Operating income
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mce_markernbsp; 546,850
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mce_markernbsp; 81,784
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$(296,135)
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mce_markernbsp; 332,499
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Comparing product line income statements in requirements 1 and 2, it appears that books are much more profitable and café loses a lot more money under the ABC system compared to the simple system. The reason is that books use far fewer S,G& A resources relative to its merchandise costs and café uses far greater S, G & A resources relative to its merchandise costs.
3. Write a memo to Super Bookstore's management describing the state of its accounting system, any improvements that you would recommend, and how the information may be useful for product line decisions.
To: Super Bookstore Management Team
From: Cost Analyst
Re: Costing System
The current accounting system allocates indirect costs (S,G& A) to product lines based on the Cost of Merchandise sold. Using this method, the S, G & A costs are assigned 54%, 35%, 11%, to the Books, CDs, and Café product lines, respectively.
I recommend that the organization switch to an activity-based costing (ABC) method. With ABC, the product lines are assigned indirect costs based on their consumption of the activities that give rise to the costs. An ABC analysis reveals that the Café consumes considerably more than 11% of indirect costs. Instead, the café generally requires 25-35% of the purchasing, receiving and stocking activity and 60% of the customer support.
The current accounting technique masks the losses being produced by the café because it assumes all indirect costs are driven by the dollar amount of merchandise sold. By adopting ABC, management can evaluate the costs of operating the three product lines and make more informed pricing and product mix decisions. For example, management may want to consider increasing prices of the food and drinks served in the café. Before deciding whether to increase prices or to close the café, management must consider the beneficial effect that having a cafe has on the other product lines.
An ABC analysis can also help Super Bookstore manage its costs by reducing the number of activities that each product line demands and by reducing the cost of each activity. These actions will improve the profitability of each product line. ABC analysis can also be used to plan and manage the various activities.