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Video of Costing Special Orders Cost Accounting CPA Exam BAR CMA Exam in Costs Accounting course by Farhat Lectures. The # 1 CPA & Accounting Courses channel, video No. 23 free certified online
How do you decide whether to accept a special order? In this cost and managerial accounting lecture, Professor Farhat explains how to evaluate a one-time special order using relevant costs, capacity assessment, opportunity cost, and qualitative factors to determine whether the order increases operating income. CPA and CMA candidates and accounting students will find this essential BAR exam material.
Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students.
Video Timeline & Key Concepts:
0:00 — Introduction: the special order decision
1:56 — Qualitative factors to consider
3:17 — Relevant vs. irrelevant costs
5:01 — Example with idle capacity
10:07 — Example with opportunity cost and insufficient capacity
Frequently Asked Questions:
What is a special order decision?
A special order is a one-time request from a third party, often at a reduced price. The goal of the analysis is to determine whether accepting the order will increase the companys operating income.
Which costs are relevant to a special order?
Only costs and revenues that differ between alternatives are relevant. Variable costs are generally relevant, while existing fixed costs are usually irrelevant unless they change because of the order.
Why does capacity matter?
If the company has idle capacity, it can fill the order using only incremental costs. If capacity is insufficient, the company incurs an opportunity cost from giving up regular production.
How does opportunity cost affect the decision?
When there is not enough surplus capacity, the lost contribution margin from displaced regular sales must be subtracted from the contribution margin gained on the special order to reach the final decision.
Is this tested on the CPA exam?
Yes. Special order decisions are tested in the BAR section and on the CMA exam as part of managerial and cost accounting.
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