Marginal Costing

This method is used particularly for short-term decision-making. Its principal tenets are:

Revenue (per product) - Variable Costs (per product) = Contribution (per product)
Total Contribution - Total Fixed Costs = Total Profit or (Total Loss)
Thus it does not attempt to allocate fixed costs in an arbitrary manner to different products. The short-term objective is to maximize contribution per unit. If constraints exist on resources, then Managerial Accounting dictates that marginal cost analysis be employed to maximize contribution per unit of the constrained resource (see Development of Throughput Accounting, above).