costs that are incurred by a business to provide its services or to make its products.
Above-The-Line Costs Details
Above-the-line costs refer to the line that separates operating costs from gross profit. Above-the-line costs are determined differently for service and manufacturing businesses. For companies providing services, above-the-line costs are costs incurred before arriving at the operating income. For companies in the manufacturing sector, above-the-line costs are deducted from sales in arriving at gross profit, including the cost of goods sold.
Above-The-Line costs are the company's sales in a certain period minus the gross profit during the specified period.
Above the line costs = Total Sales - Gross Profit
On the income statement of good-producing companies, there's a line after the gross profit. Detailed operating expenses are written after this line. Service providing companies indicate the details of their costs and sales in the revenue report.
Most companies use the above-the-line to specify their expenses and earnings that may impact the profit but have no effect on the capital. For service-providing companies, any above-the-line expenditure is considered an expense. On income statements of manufacturing companies, above-the-line costs are the cost of goods sold (COGS) or cost of sales (COS).
Example of Above-The-Line Costs
As an example, suppose company A is a manufacturing company. It records $30 billion in sales in a quarter, with a gross profit of $10 billion during this period. Therefore the company will determine its above-the-line costs by deducting gross profit from the total sales, resulting in $20 billion.
Company B is a service-providing company. It doesn't produce any goods. It records revenues of $7 billion in a quarter with a $250 billion operating income during that period. Since it's not a manufacturing company, there's no cost of sales or cost of goods sold involved in evaluating gross profit. All expenditures above the operating income are regarded as above-the-line costs.
Suppose Company C is a utility company. It reports a $4 billion operating revenue in a quarter and $8 million operating income during that period. All high costs, including operation costs, electricity costs, maintenance costs, and amortization and depreciation, are above the operating income.
Above-The-Line Costs vs. Below-The-Line Costs
The significant differences between above-the-line costs and below-the-line costs are as follows:
- On the income statement, above-the-line costs are profits separated from other expenses. They are the cost of sales and the cost of goods sold. At the same time, below-the-line costs are extraordinary expenses or income incurred by a company. These expenses or incomes, however, do not repeat. Neither does it affect the company's profit or revenue.
- Above-the-line costs incurred by the cost of goods sold are earnings to the price of raw materials, manufacturing cost, and labor. In contrast, below-the-line costs are interests, operating expenses, and taxes.
- Above-the-line costs refer to the gross margin earned by a company, whereas items below the gross profit are below-the-line costs. They include operating expenses such as interests, taxes, and other extraordinary expenses.
- Above-the-line costs refer to all expenses and income associated with the normal operations of a business. Below-the-line costs, on the other hand, are extraordinary expenses or incomes that a company incurs. Still, these expenses or income do not affect the profit or revenue of the company.