The correct sequence of steps in hypothesis testing is:

1. State the hypothesis - Formulate the null hypothesis (H₀) and alternative hypothesis (H₁)
2. Select the level of significance - Choose the alpha level (typically 0.05, 0.01, or 0.10) which determines the probability of Type I error
3. Formulate the decision rule - Determine the critical value(s) or rejection region based on the significance level and test distribution
4. Compute the test statistic - Calculate the test statistic from the sample data
5. Make a decision - Compare the test statistic with the critical value or use p-value to decide whether to reject or fail to reject the null hypothesis

Option B correctly follows this logical sequence. The decision rule must be formulated BEFORE computing the test statistic because the decision rule establishes the criteria for making the decision based on the test statistic value.