Below quoted advice is pinched from here, How to paint a wood house?
If you encounter any damp, rotten, etc wood during the preparation stage, I highly recommend removing it. When doing so, cut 150mm (6inch) past the last sign of damage ie Get back to good, solid wood. Preferably re-patch with the same wood species.
In your particular situation (outdoors, horizontal surface) I would not recommend filling such a large hole with any kind of filler.
If you feel confident enough in your woodworking skills (or don't mind a challenge and want to learn something new), I say go with the above quoted method. If you were going to paint the wood, not stain it, I would be more likely to go with this method (paint can cover those little mistakes, where as stain is unforgiving).
That said it might just be easier (and cheaper) to remove the 4 pieces of wood completely and replace them with new timber, especially if you are going to stain the wood.
As far as books, I highly recommend The Complete Book of Woodworking: http://www.amazon.com/The-Complete-Book-Woodworking-Detailed/dp/1890621366/ref=sr_1_1?ie=UTF8&qid=1335885982&sr=8-1. It's easy to follow even for the uninitiated. It goes over the major tools, what they are used for, and has excellent instructions on some starter and intermediate projects. There are even some workbench projects toward the end, one of which is made only from plywood and 2x4 lumber. I made it with a jigsaw and really uneven cuts, and it's held together well for about a year (it's usable for everything except hand planing). I'm also a software engineer by trade and learn well from books, so I spent a good few months obsessing over this book in my apartment before buying a house and really getting started.
For video instruction, The Wood Whisperer is one of my favorites; he gets into what tools are used for, how to set them up and tune them, and has some videos dedicated to safety. He's also very technical and comes from a science background, so the engineer in me relates well with him. He doesn't leave out many details. Fine Woodworking is also very good and for $5 a month you can get access to a ton of video content.
http://www.thewoodwhisperer.com
http://www.finewoodworking.com
SawmillCreek and WoodworkingTalk are nice forums to search through for tips and discussions about what tools are best used for what projects.
http://www.sawmillcreek.org
http://www.woodworkingtalk.com
Most of these will discuss fine woodworking, furniture making, and detailed joinery, which you may or may not be interested in. All of them, however, will give you information you want about tool usage. It may be more detail than what you're interested in for the projects you describe, but if anything you'll be over-prepared.
Best Answer
The best bet for this is to use a drill press so that you can maintain positioning of the block and the drilling tool for an even and square operation. A drill press often also includes a depth stop to help with maintaining a repeatable drill depth if you are producing multiple parts.
The type of drilling bit you want to use for an operation like this would be a Forstner bit. For shallow depth drilling you will want to use the type of bit that looks as follows with the smooth sharp radial cutters.
Avoid the type of bit that has the multi toothed radial cutters as this will not give you as smooth of edge on your shallow depression.
For safety sake make sure to securely clamp the small block of wood to the table of the drill press. One recommendation to make things a lot safer is to drill your shallow depressions into the face of a longer piece of material and then cut it down to size. It is far easier to clamp a larger piece.