Special order definition
/What is a Special Order?
A special order is any customer order for goods or services that is not routinely handled by a business. Since a business has little experience with these orders, it probably has only a modest understanding of the costs that it will incur. Of particular concern is that these deals may alter the cost structure of the business for the duration of the order. A thoughtful analysis of the costs associated with a special order may reveal several types of overhead cost that may be incurred specifically because of that order. Here are several examples of the extra costs associated with special orders:
A financial analyst may have to be involved in calculating whether the price point requested by the customer will be profitable for the company.
A senior manager may have to sign off on the decision.
The product design staff may have to create a new product design.
The materials management staff may have to be brought in to purchase special raw materials and components for the order.
A second shift production line may need to be started up, which requires manager oversight, an extra quality control person, and a materials handler whose services would not otherwise be needed.
Thus, a tight focus on the incremental changes in costs needed to process a special order is essential to ensuring that it is priced appropriately.
Given the costing complexities associated with special orders, some businesses refuse to accept these types of orders. They may even refer these orders to a competitor, in hopes that the competitor will lose money on them.
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Characteristics of a Special Order
Special orders have quite different characteristics from orders received in the ordinary course of business. These special characteristics are as follows:
Non-recurring nature. A special order is typically a one-time request that falls outside the company’s normal sales operations or product offerings. It may come from a new or existing customer seeking a customized solution or large volume. Since it is not part of standard business, it requires unique pricing and production considerations.
Custom specifications. Special orders often involve specific requirements such as product modifications, packaging changes, or unique delivery terms. These specifications are not part of regular inventory or production routines and may require adjustments in processes or sourcing. The company must evaluate whether it has the capacity or resources to fulfill the request without disrupting normal operations.
Pricing flexibility. Special orders frequently involve negotiated pricing, which may be lower than standard prices to win the business or utilize excess capacity. Since fixed costs are typically already covered, only variable costs are considered in the pricing decision. Profitability is analyzed based on incremental revenue versus incremental cost.
Impact on capacity. A special order can affect a company’s available production or service capacity. If the company is operating below capacity, the order may be easily accommodated; if at full capacity, it may displace regular sales. This requires management to assess opportunity costs before accepting the order.
Unique approval process. Unlike regular transactions, special orders often require management review and approval due to pricing, customization, and operational implications. Departments such as sales, finance, and production may all be involved in the decision-making process. This ensures that the order aligns with strategic and financial goals.