In a contribution margin income statement, costs are organized based on what criteria?

In a contribution margin income statement, costs are organized based on their behavior, specifically distinguishing between fixed and variable costs. This format helps businesses analyze how much revenue is available to cover fixed costs and contribute to profits after accounting for variable costs associated with the production of goods or services.

Variable costs change in total with the level of production or sales, meaning they increase as production increases and decrease as production decreases. Examples include costs of raw materials and direct labor. Conversely, fixed costs remain constant regardless of production volume, such as rent or salaries of administrative staff. By separating these costs, a contribution margin income statement allows management to understand the impact of production levels on profitability more clearly, aiding in decision-making related to pricing, budgeting, and operational efficiency.

This format contrasts with other criteria for organizing costs, such as function (which groups costs by department such as manufacturing, selling, and administrative), suggesting different analytical approaches but not capturing the contribution of sales to fixed costs and profits as effectively.