Cost Accounting · Contract Costing

Contract Costing under AS 7 and Ind AS 115

Updated 10 October 2026 · Fact-checked

AS 7 says that when a contract's outcome can be estimated reliably, you recognise revenue and cost in proportion to the stage of completion at the reporting date. Stage of completion is usually cost to date ÷ total estimated cost. Any expected loss is recognised in full immediately. Ind AS 115 follows a similar over-time approach.

Understand Contract Costing under AS 7 and Ind AS 115

A contract runs for more than one year. If you waited until completion to show any profit, the early years would show nothing and the last year would show everything. Accounting standards fix this by recognising revenue and cost as the work progresses.

AS 7 (Construction Contracts) applies to entities that do not follow Ind AS. Contract revenue is the initially agreed price plus variations, claims and incentive payments, but only to the extent it is probable they will be received and they can be measured reliably. Contract costs cover costs directly related to the contract, costs attributable to contract activity in general that can be allocated to it, and other costs chargeable to the customer under the contract terms.

If the outcome can be estimated reliably, you use the percentage of completion method. You work out the stage of completion, then recognise revenue and cost for that portion. The difference is the profit for the period. The stage can be measured by cost incurred to date as a proportion of total estimated cost, by a survey of work performed, or by the physical proportion of the contract completed. In exam numerical questions, the cost proportion method is the default unless the question gives a different basis.

If the outcome cannot be estimated reliably, you do not take profit. Revenue is recognised only up to the contract costs incurred that are likely to be recovered, and all costs are expensed in the period.

Foreseeable loss: if total estimated cost exceeds total contract revenue, the whole expected loss is recognised as an expense immediately. This applies whether or not work has started and whatever the stage of completion. This is prudence at work.

Ind AS 115 (Revenue from Contracts with Customers) applies to Ind AS entities and replaces the old Ind AS 11. It uses a five-step model: identify the contract, identify the performance obligations, determine the transaction price, allocate the price, and recognise revenue when or as each obligation is satisfied. Construction work usually satisfies obligations over time, so revenue is measured by progress using an input method (such as costs incurred) or an output method. A loss-making contract is treated as an onerous contract under Ind AS 37, and a provision is made for the expected loss. Incremental costs of obtaining a contract and costs of fulfilling it are capitalised only if the standard's conditions are met.

Key rules to remember

Stage of completion (cost method): Stage of completion % = Contract cost incurred to date (relating to work done) ÷ Total estimated contract cost × 100; Leave out costs of future activity, such as materials delivered to site but not yet used, from the cost to date. Treat them as part of the further cost still to be charged. So total estimated cost = relevant cost to date + further cost, where further cost includes the unused materials. The total therefore still includes them, and numerator and denominator are on the same basis.
Revenue to recognise (cumulative): Cumulative revenue = Total contract price × Stage of completion %; Revenue for the year = cumulative revenue − revenue recognised in earlier years.
Profit to recognise: Profit recognised = Revenue recognised − Cost recognised; With the cost method this equals expected total profit × stage of completion %.
Expected loss on a contract: Expected loss = Total estimated cost − Total contract price (when positive); Recognise the whole amount immediately as an expense.
Additional loss provision: Provision for foreseeable loss = Total expected loss − Loss already shown through revenue less cost to date; After this, the total charge to profit equals the full expected loss.
Outcome not reliably estimable (AS 7): Revenue = Contract costs incurred that are likely to be recovered; Profit = nil; All costs are expensed in the period.

How to solve Contract Costing under AS 7 and Ind AS 115 questions

Use this order for any AS 7 or Ind AS 115 contract question. It also protects your step marks.

1Write the contract price and add any agreed variations, claims or incentives that the question says are probable.
2Compute cost incurred to date. Remove costs relating to future work, such as unused materials at site, when finding the stage of completion. Treat them as further cost still to be charged.
3Compute total estimated cost = relevant cost to date + further cost (including the unused materials). This equals total cost to date + estimated further cost to complete.
4Compare total estimated cost with contract price. If cost is higher, there is an expected loss, so go to step 6.
5For a profitable contract, find stage of completion % and cumulative revenue = price × stage %. Deduct revenue of earlier years to get the current year's revenue.
6Recognise cost for the year. Profit = revenue − cost. For a loss contract, show revenue less cost to date, then add a provision so that the full expected loss is charged now.
7State the closing figures and any disclosure, such as amount due from customers or provision for loss, and add a one-line interpretation.

Quickest way: Total-profit shortcut

When to use it: Use when the question gives price, cost to date and further cost, and asks for profit or loss to be recognised.

Total estimated cost = cost to date + further cost. Expected total profit (or loss) = price − total estimated cost.
If it is a loss, write the whole loss as the answer for the period (less any loss already booked in earlier periods). Stop there.
If it is a profit, stage % = relevant cost to date ÷ total estimated cost. Profit = expected total profit × stage %.
Cross-check: revenue − cost recognised should give the same profit.

Common mistakes in Contract Costing under AS 7 and Ind AS 115

Including unused materials at site in the cost used for stage of completion.
Students take the whole cost to date as work done.
Fix: Subtract materials not yet used from the cost to date used for the stage. Treat them as further cost still to be charged, so total estimated cost still includes them and both parts of the ratio stay on the same basis.
Booking only a proportionate part of an expected loss.
Students apply the stage % to the loss as they do to profit.
Fix: Recognise the entire expected loss at once. The stage % only decides how much appears through revenue less cost.
Forgetting that the loss provision is the balancing amount.
Students show the loss to date and stop.
Fix: Provision = total expected loss − loss to date. Check that the two add up to the full loss.
Taking profit when the outcome cannot be estimated reliably.
Students apply the percentage method without reading the facts.
Fix: If the question says reliable estimation is not possible, recognise revenue equal to recoverable cost incurred and show nil profit.
Showing cumulative revenue as the revenue of the current year.
Students ignore revenue taken in earlier years.
Fix: Current year revenue = cumulative revenue − earlier years' revenue. Do the same for cost.
Mixing AS 7 and Ind AS 115 language.
Both standards deal with long contracts.
Fix: Use 'contract revenue' and 'stage of completion' for AS 7. Use 'performance obligation', 'transaction price' and 'onerous contract' for Ind AS 115 and Ind AS 37.

Worked examples

Example 1

Sharma Constructions has a fixed price contract of ₹50,00,000. Cost incurred to date is ₹24,00,000, which includes ₹2,00,000 of materials at site not yet used. Estimated further cost to complete is ₹16,00,000. The outcome can be estimated reliably. Find the revenue, cost and profit to recognise under AS 7.

Show the solution

Cost relating to work done = ₹24,00,000 − ₹2,00,000 = ₹22,00,000.
The unused materials of ₹2,00,000 relate to future work. Treat them as further cost still to be charged: ₹2,00,000 + ₹16,00,000 = ₹18,00,000.
Total estimated cost = ₹22,00,000 + ₹18,00,000 = ₹40,00,000. This is the same as ₹24,00,000 + ₹16,00,000, so the total still includes the unused materials.
Expected total profit = ₹50,00,000 − ₹40,00,000 = ₹10,00,000, so there is no foreseeable loss.
Stage of completion = ₹22,00,000 ÷ ₹40,00,000 = 55%.
Revenue = ₹50,00,000 × 55% = ₹27,50,000.
Cost recognised = ₹22,00,000. Profit = ₹27,50,000 − ₹22,00,000 = ₹5,50,000.
Check: ₹10,00,000 × 55% = ₹5,50,000.

Answer: Revenue ₹27,50,000; cost ₹22,00,000; profit ₹5,50,000. The ₹2,00,000 of unused materials is carried forward as an asset (stock at site) and forms part of the further cost still to be charged.

Example 2

Iyer Infra has a fixed price contract of ₹80,00,000. Cost incurred to date is ₹30,00,000, all relating to work done. Estimated further cost is ₹60,00,000. This is the first year of the contract. Show the amount to be recognised under AS 7, including the foreseeable loss.

Show the solution

Total estimated cost = ₹30,00,000 + ₹60,00,000 = ₹90,00,000.
Expected loss = ₹90,00,000 − ₹80,00,000 = ₹10,00,000. The whole loss must be recognised now.
Stage of completion = ₹30,00,000 ÷ ₹90,00,000 = 1/3.
Revenue = ₹80,00,000 × 1/3 = ₹26,66,667 (rounded).
Cost recognised = ₹30,00,000. Loss through revenue less cost = ₹26,66,667 − ₹30,00,000 = ₹3,33,333.
Additional provision for foreseeable loss = ₹10,00,000 − ₹3,33,333 = ₹6,66,667.
Total charge to profit = ₹3,33,333 + ₹6,66,667 = ₹10,00,000.

Answer: Revenue ₹26,66,667; cost ₹30,00,000; additional provision for foreseeable loss ₹6,66,667. The total loss of ₹10,00,000 is recognised in the first year. Under Ind AS 115 the same loss would be provided as an onerous contract under Ind AS 37.

Exam tips

Read for the phrase 'outcome can be estimated reliably'. It decides between the percentage method and the cost-recovery treatment.
Always compute total estimated cost first. It tells you at once whether the contract is profitable or loss-making.
Show the foreseeable loss as a separate line. Examiners look for it, and it carries step marks.
For MCQs, a quick test: if estimated total cost exceeds the price, the answer is the full loss, not a proportion.
In theory questions, state the standard names correctly: AS 7 for non-Ind AS entities, Ind AS 115 (with Ind AS 37 for onerous contracts) for Ind AS entities.

Practice questions from Contract Costing

Contract Costing under AS 7 and Ind AS 115 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Contract Costing under AS 7 and Ind AS 115: frequently asked questions

What is the percentage of completion method in AS 7?

It recognises contract revenue and cost in proportion to the stage of completion at the reporting date. The stage is commonly cost to date divided by total estimated cost. The method is used only when the outcome can be estimated reliably.

How do I treat an anticipated loss on a contract?

Recognise the whole expected loss as an expense immediately. This applies even if work has barely started. Show the loss through revenue less cost to date, then add a provision for the rest.

Does Ind AS 115 replace AS 7?

For entities following Ind AS, Ind AS 115 replaces the earlier construction contracts standard, Ind AS 11. AS 7 continues for entities that follow the Accounting Standards. Both recognise revenue as work progresses, but Ind AS 115 uses a five-step model and performance obligations.

Should unused materials at site be counted in stage of completion?

No, not when using the cost method. They relate to future work, so leave them out of the cost to date used for the stage. Treat them as part of the further cost still to be charged. Total estimated cost therefore still includes them, so both parts of the ratio are on the same basis.