Above the Line Costs - Explained

What are Above the Line Costs?

What are Above-The-Line Costs?

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.

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How are Above-The-Line Costs Used?

The companies that produce goods, deduct the above-the-line-costs from sales to estimate the gross profit. Basically, the above-the-line cost is the company's sales in a specific period minus the gross profit in that period. It is a way to estimate the costs before incurring costs. On an income statement of the manufacturing companies, there is a line after the gross profit. The detailed operating expenses which are hidden expenses are written after this line. Service providing companies provide the details of their sales and expenses in the revenue report. All the expenses that are beyond the line of operating income are considered to be the over-limit costs. Here are a few examples to explain the idea of Above-The-LIne-Costs. Here are a few examples to explain the idea of Above-The-LIne-Costs. Suppose A is a manufacturing company. It reports sales of \$ 20 billion in a quarter and its gross profit in this period is \$ 9 billion. So, the company's above-the-line-costs is this quarter will be calculated as \$ 11 billion. B is a service providing company and doesn't produce any good. It reports revenues of \$ 5 billion in a quarter and its operating income is \$ 300 million in that quarter. As it is not a manufacturing company there is not COGS or COS involved in the calculation of gross profit. All the costs above the operating income are considered to be the above-the-line-costs. C is a utility company. It reports its operating revenue as \$ 3 billion and operating income as 8 million in a quarter. The major costs including the cost of electricity, operation, maintenance, and depreciation and amortization are above the line of operating income.