Wanted to find out why we settle production orders to a material and how this works (the background to this).

You create a production order with material so as to produce / manufacture that material in your plant.

When you produce any material you plan / estimate the price of that material initially. When you actually start producing that material you book actual cost on that production order.

So ultimately you have a planed price of the material say Rs. 100 and you have actual cost say Rs. 120 required to produce that material.  This means that you have incurred a loss of Rs 20 while producing that material.  So now the actual price of material is 120 but you have estimated Rs 100.

Now this Rs 20 has to be loaded on the material. This is done through the settlement against material.  The difference betwwen the plan cost and the actual cost i.e. Rs 20 is transferred to the material by settlement.

The same applies in the case of price control "S" ie. repetitive manufacturing and for all the in-process materials price control is "S".

When we do the settlement it will hit the material but under a different account. If it is a loss it will hit the "price difference account - loss". If it is a gain then the amount will go to the "price difference - gain" for that material.

In the above example given, actual cost of the material is rs 120, and estimated price is rs 100, but when you see the material stock report, you will be able to see only rs 100 and not rs 120, even after settlement.

As mention, rs 20 will be taken to the price difference account, which is debit side of the p/l a/c.

This is because when you do a cost roll up to decide the standard price of the material and the price also gets updated as a standard price of the material in the accounting1 view of the material master.

Whenever a GR happens to any material it happens at the price matained in the material master so the stock will be generated at Rs 100 only.

Plan price Rs 100 and Actual Price 120 is actually the variance which should go to COPA for material varance analysis.

You have decided that you will sell that material to customer at the final price of Rs 100 and you have incurred a loss of Rs. 20 because of some reason.

You can't tell customer that you have incurred loss of Rs 20 so now purchase the matrial at Rs 120 from me.  That loss will remain with you only in price difference account.

If you want to recover that loss it will be by some other mechanism and not by actully changing the price of the material or it's stock value.

Tips by  Pradeep

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