After all material has been issued to the production order, the decision is to 'cancel' the order. When you attempt to cancel, the status is changed to 'To Be Cancelled'. A negative 'to issue from warehouse' quantity is generated.

How does the processing of returned material happen. Can't seem to generate inbound/outbound or view the details through the receipts session.

I would just like to 'close' the order out and not worry about the material issued, just let it flow through as material variances.

Post it complete with a qty of zero,
this will cleave all inventory in shop order and when you close it will be posted to varience accounts