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An entity has cost-to-cost input method on a long-term construction contract. During the year, wasted materials worth ₹5 lakh were consumed due to entity inefficiency NOT reflected in the contract price. When measuring progress under Ind AS 115, the entity should:
ADefer the wasted cost as a contract asset and amortise it over the project
BEXCLUDE the wasted-materials cost from the cost-to-cost ratio — it doesn't contribute to satisfying the PO
CInclude it only if customer signed off on the inefficiency
DInclude the wasted cost in the cost-to-cost ratio — it reflects actual resource consumption
Answer & Solution
Correct answer: B. EXCLUDE the wasted-materials cost from the cost-to-cost ratio — it doesn't contribute to satisfying the PO
Para B14 — costs that do NOT contribute to the entity's progress in satisfying the PO (e.g., wasted materials/labour reflecting inefficiency not reflected in the contract price) must be EXCLUDED from the input measure. Including them would artificially inflate the cost-to-cost ratio and over-recognise revenue. The wasted cost is expensed but not used in the progress measure.
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