Which costs should be capitalised under contract costs?

Capitalizing costs under contract accounting is primarily concerned with aligning expenses with revenue recognition. According to the relevant accounting standards, particularly IFRS 15, costs that are directly attributable to obtaining and fulfilling a contract should be capitalized.

Costs of obtaining the contract may include sales commissions or other costs that would not have been incurred if the contract had not been obtained, while costs of fulfilling the contract are those that relate to the actual delivery of goods or services as stipulated in the contract. This approach ensures that these costs are recognized in the same period as the revenue generated from the contract, thereby providing a more accurate financial picture.

Labor costs associated with delivery alone do not encompass the full scope of what costs should be capitalized. Similarly, operational expenses related to production or materials directly used in fulfillment are narrower aspects that do not include the broader requirements of obtaining the contract. Thus, the comprehensive inclusion of both obtaining and fulfilling costs under contract accounting distinguishes the correct answer. This practice is essential for effective matching of costs with the revenues they generate in the context of specific contracts.