Above-the-Line Costs

What Are Above-the-Line Costs?

Above-the-line costs are the costs incurred by a business to make the product it sells or to offer its support. For assembling type businesses, above-the-line costs are any costs deducted to show up at gross profit, to be specific the cost of goods sold (COGS). Notwithstanding, for service companies, above-the-line costs are costs that are deducted in showing up at operating profit, which incorporates COGS yet additionally all selling, general, and administrative (SG&A) costs.

Understanding Above-the-Line Costs

For manufacturers, above-the-line costs are just another approach to expressing costs before operating expenses. These are probably going to incorporate the costs of raw materials, facilities, wages, and other expenses to fabricate the end result and deliver it to consumers. These costs are deducted from sales to show up at gross profit.

After gross profit on the income statement is operating expenses, as well as other expenses like interest and taxes. These are below-the-line costs.

For service businesses, above-the-line costs are any costs incurred before showing up at operating income. Expenses incurred thereafter, for example, interest and taxes are viewed as below the line.

Special Considerations

A different interpretation of above the line can allude to all income or expenses connected with normal business operations. That is every type of effort on the income statement that connects with profits and not transactions that main impact the cash flow statement or balance sheet. In that case, below the line would incorporate just extraordinary or non-repeating income or expenses. Or on the other hand any transaction that doesn't impact the company's continuous revenue or profits.

Above-the-Line Costs versus Below-the-Line Costs

Above-the-line costs are generally viewed as the cost of making the company's product, like worker salaries, equipment, raw materials, and maintenance. Below-the-line costs are the other expenses that keep the company going — the cost of printer paper and fax machines, management and human resources, advertising efforts, also the salaries of the accounting department itself.

Since above-the-line costs are a direct consequence of production, they will generally shift more over a shorter period of time compared to below-the-line costs. Key below-the-line costs, like rent, will generally stay steady paying little heed to sales and production numbers.

Above-the-line costs will generally fluctuate more over a shorter period of time than below-the-line costs.

True Examples

For instance, Nike Inc. reported $44.54 billion in sales for fiscal year 2021 (ended May 31, 2021). Gross profit was $19.96 billion. Therefore, Nike's above-the-line costs for the quarter were $24.58 billion, which the company names cost of sales on its income statement.

Likewise think about Expedia Inc., the movement website, which reported $8.60 billion in revenue for 2021 and an operating income of $186 million. The company isn't engaged with the production of goods so the company doesn't involve gross profit as a measurement in its income statement.

All expenses before operating income are viewed as above-the-line costs for Expedia, including the cost of revenue and selling and marketing expenses, which added up to $8.41 billion of every 2021.

Features

• There is a wide gray area between these differentiations. What is viewed as above the line at one company may be below the line at another company.
• Above-the-line costs for service suppliers or utilities generally incorporate all costs above operating profit.
• Above-the-line costs incorporate all costs above the gross profit, while below-the-line costs incorporate costs below gross profit.
• Above-the-line costs are frequently alluded to as the cost of goods sold (COGS), while below-the-line is operating and interest expenses and taxes. This definition generally connects with manufacturers.
• In service industries, above-the-line costs are now and again alluded to as cost of sales (COS).