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
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-
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.