What Are Above-The-Line Costs?
Above-the-line costs are the costs incurred by the business to make the product it sells or to provide its service. Above-the-line costs are determined differently for manufacturing and service businesses. For manufacturing-type businesses, above the line costs are any costs deducted to arrive at gross profit, namely cost of goods sold (COGS).
For companies in the service sector above-the-line costs are costs that are deducted in arriving at operating profit, which includes COGS but also all selling, general and administrative (SG&A) costs.
- Above-the-line costs include all costs above the gross profit, while below-the-line costs include costs below gross profit.
- Above-the-line costs are often referred to as the cost of goods sold (COGS), while below-the-line is operating and interest expenses and taxes. This definition mostly relates to manufacturers.
- Above-the-line costs for service providers or utilities generally includes all costs above operating profit.
Understanding Above-The-Line Costs
For manufacturers, above-the-line costs are just another way of saying costs before operating expenses. Simply, they are COGS or the equivalent account that is subtracted from sales to arrive at gross profit. After gross profit on the income statement, there is a line, followed by itemized operating expenses. These are below-the-line costs.
For service businesses, above-the-line costs are any costs incurred before arriving at operating income. Expenses incurred thereafter, such as interest and taxes are considered below-the-line.
A different interpretation of above the line can refer to all income or expenses related to normal business operations. That's all activity on the income statement that relates to profits and not transactions that only impact the cash flow statement or balance sheet. In that case, below the line would include only extraordinary or non-recurring income or expenses. Or any transaction that does not impact the company’s ongoing revenue or profits.
Above and below the line may also relate to filmmaking or marketing. In filmmaking, above the line refers to the budget for directors, actors, story writers, and the likes, while below the line includes the rest of the production team or crew. In marketing, above the line is related to mass media marketing, while below the line is direct marketing.
Above the line can refer to various things, including having different meanings when it comes to the income statement. Some companies consider above-the-line costs to be costs above gross profit, while others consider it as costs above operating profit.
Above-The-Line Costs vs. Below-The-Line Costs
Above-the-line costs are a company’s cost of goods sold, also called cost of revenue or cost of sales. Below-the-line costs are all operating and interest expenses and taxes. Above-the-line costs are those above the gross profit line, while below-the-line costs include costs below gross profit, namely operating expenses.
Above-the-line costs are the direct inputs for creating a product or service, while below-the-line costs are all the other costs it takes to market, sell, or bring the product or service to customers. Above-the-line costs include COGS, which include all related costs for creating or acquiring a product, including direct labor wages, cost of raw materials, and manufacturing costs.
Example of Above-the-Line Costs
As an example, Nike Inc. reported $39.1 billion in sales in its fiscal year 2019. Gross profits were $17.5 billion. Therefore, Nike's above-the-line costs for the quarter were $21.6 billion, which the company labels cost of sales on its income statement.
Also consider Expedia Inc., the travel website, which reported $3.2 billion in revenue in its second quarter of 2019 and an operating income of $265 million. The company is not involved in the production of goods so the company does not use gross profit as a metric in its income statement.
All expenses before operating income are considered above-the-line costs for Expedia, including the cost of revenue and selling and marketing expenses, among others.