What Are Above-The-Line Costs What s Included Vs Below-The-Line
Dr. Melody Bell, a personal finance expert, entrepreneur, educator, and researcher, now develops personal finance curricula, teaches postsecondary business and finance courses, and provides strategic consulting for businesses. She founded Financial Beginnings, a national nonprofit, after a career in finance.
Above-the-line costs are the costs incurred by a business to make the product it sells or to provide its service. For manufacturing-type businesses, above-the-line costs are the costs deducted to arrive at gross profit, specifically the cost of goods sold (COGS). However, for service companies, above-the-line costs include costs deducted in arriving at operating profit, which encompasses COGS and all selling, general, and administrative (SG&A) costs.
Key Takeaways:
-Above-the-line costs include all costs above gross profit, whereas below-the-line costs include costs below gross profit.
-Above-the-line costs are often referred to as the cost of goods sold (COGS), whereas below-the-line refers to operating and interest expenses and taxes. This distinction is more applicable to manufacturers.
-In service industries, above-the-line costs are sometimes referred to as the cost of sales (COS).
-Above-the-line costs for service providers or utilities generally encompass all costs above operating profit.
-There is a wide gray area between these distinctions. What is considered above the line at one company might be below the line at another company.
For manufacturers, above-the-line costs represent costs before operating expenses. These costs typically include raw materials, facilities, wages, and other expenses associated with manufacturing the final product and delivering it to consumers. These costs are subtracted from sales to determine gross profit.
After gross profit on the income statement, there are operating expenses, as well as other expenses such as interest and taxes. These are considered below-the-line costs.
For service businesses, above-the-line costs are any costs incurred before arriving at operating income. Expenses incurred afterward, such as interest and taxes, are considered below-the-line costs.
Special Considerations:
A different interpretation of above the line can encompass all income or expenses related to normal business operations. This includes all activities on the income statement that contribute to profits rather than transactions that only impact the cash flow statement or balance sheet. In this case, below the line would include only extraordinary or non-recurring income or expenses, as well as any transactions that do not impact the company’s ongoing revenue or profits.
Above-the-Line Costs vs. Below-the-Line Costs:
Above-the-line costs primarily involve the cost of creating the company’s product, such as worker salaries, equipment, raw materials, and maintenance. Below-the-line costs encompass other expenses that sustain the company, including the cost of printer paper, fax machines, management and human resources, advertising campaigns, and the salaries of the accounting department.
Because above-the-line costs directly result from production, they tend to fluctuate more in the short-term compared to below-the-line costs. Key below-the-line costs, such as rent, remain relatively constant regardless of sales and production numbers.
Real-World Examples:
Expedia Inc., the travel website, reported $8.60 billion in revenue for 2021 and an operating income of $186 million. As the company is not involved in the production of goods, it does not use gross profit as a metric in its income statement.
All expenses before operating income, including the cost of revenue and selling and marketing expenses, which totaled $8.41 billion in 2021, are considered above-the-line costs for Expedia.
Source: SEC.
