Above-The-Line Costs Definition
Here the line refers to the line that divides gross profit from operating costs. For the companies providing services, this indicates to the line that separates the operating income from other expenses. Above-The-Line is used by the companies for characterizing their earning and expenses during normal operations that impact the profit but do not have any effect on the capital. On an income statement of the manufacturing company, the above-the-line costs are generally known as COS (cost of sales) or COGS (cost of goods sold). The service providing companies consider the expenditure that is above the line as an expense at the top of the line.
Note:- “Above the line cost” has different meanings, depending on the industry and company. Some companies consider above-the-line costs to be costs above gross profit, while others consider them as costs above operating profit.
What is Above the Line Cost?
Above the line refers to all revenue generated and expenses incurred by a business that have a direct impact on reported profits. In effect, the term includes all activity reported on an organization’s income statement. The term does not refer to other activity that only impacts the financing or cash flows of the business. For example, the receipt of funds from the sale of company stock is not considered to be above the line. Conversely, the sale of goods and the associated cost of goods sold are considered to be above the line.
A different interpretation of the concept is that “above the line” refers to the gross margin earned by a business. Under this interpretation, revenues and the cost of goods sold are considered to be above the line, while all other expenses (including operating expenses, interest and taxes) are considered to be below the line.
- 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.
- In service industries, above-the-line costs are sometimes referred to as cost of sales (COS).
- Above-the-line costs for service providers or utilities generally include 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.
The Difference Between Above the Line and Below the Line Expenses
Above the line expenses are more likely to be recurring in nature, while below the line expenses are more likely to be non-recurring (unusual). Also, above the line expenses are related to the operations of a business, while below the line expenses are more likely to be associated with loss events, taxes, or financial transactions.