What is Production Order Settlement?

Settlement is nothing but offsetting the costs to the FI portion. CO objects carry costs, which
needs to be re-assignd to the G/L accounts where it comes from.

CO never generates any data, it only tracks the same onto some objects which are analysed for
definite purpose of tracking the resources which are debits in FI as costs in G/L).

In simple words, the flow is like following -

1. Direct Costs are incurred ( like material consuption ) in form of issues to prod orders. These
are captured in G/L. Whenever you issue, consumption account is debited. But are also debited
to prod order as

Consumption...Dr
Inventory.......Cr

2. Indirect costs are incurred in form of debits to Cost centers in G/Ls. These are actually to be
allocated & absorbed in Products via Prod Orders. So it is allocated to prod orders via diff media
like costing sheet or Indirect activity allocations.
Here again Prod order is debited with some amount.

When the costs are incurred these should be transffered futher when the order is closed or
deliverd to stock.
So whenever you deliver the order, the follwing entry is generated-

Inventory....Dr
Cost of Prod /Mfg Variance.....Cr

If your Fin Goods' predetermined cost are same as that of actual costs incurred, there will no
price difference account affected. But when your plan cost ( target cost ) & actual costs are
differnet, the difference is OFFSET or SETTELLED
to price diff accout as-

Cost of Prod / Mfg Var....Dr

Price diff acc..........Cr

Note that Price diff accont is not created as COST ELEMENT.

If actual cost is less than target cost, entry would be reverse.

The theory behind WIP is where you may have a production order that has had
various costs charged into it (materials and/or overheads) but where at the close of
an accounting period that production order is not finished.
Therefore, the costs that have been charged into that production order, which at
that point in time are considered P&L costs, need to be credited out of the P&L and
debited into the Balance Sheet as 'WIP'.

This transaction does the calculation against the production order and then the
settlement transactions does the actual posting entry debiting the Balance Sheet
WIP account.