Home Business Above-the-line costs for manufacturing and service businesses

Above-the-line costs for manufacturing and service businesses

by Lee Mark

What are above-the-line costs?

A business incurs above-the-line costs to make its products and services. This can be different for every manufacturer or service provider. For companies in the manufacturing field, the above-the-line cost is the cost that we deduct to get the gross profit. We also call them COGS or cost of goods sold. On the other hand, we also have the service sector. In this field, we say above-the-line costs when referring to the costs we deduct to get the operating profits. These profits include COGS and selling, general, and administrative costs.

Manufacturers, service sectors, and above-the-line costs

The above-the-line cost is another way for manufacturers to call the cost before operating expenses. And when we talk about this, we consider the amount of raw materials, wages, facilities, and the like to come up with a final product to deliver to customers. This amount is what we subtract from the sales to get the gross profit. If we have above-the-line costs, there should be below-the-line costs. In the income statement, you will see a line after the gross profit. There, you will see the breakdown of operating expenses in a detailed manner. You will also find other expenses like taxes and interests.

For those companies in the service business, above-the-line costs are the ones they incur before arriving at an operating income. There is also a below-the-line for them, and those are the expenses incurred after. For instance, we also have interests and taxes.

Looking at above the line cost from a different perspective

Some people will define above-the-line costs differently from what we have just explained. Some people describe it as the total income or expenses involving typical business operations. It refers to every activity on the income statement related to profits. And when we say “related to profits,” this does not include the transactions that only affect the cash flow statement or the balance sheet. Hence, below-the-line costs are the ones that include uncommon or non-recurring income or expenses. Also, it can be any transaction that does not affect the company’s current revenue and profits.

Aside from businesses and finance, there are also people from totally different fields who have a different meaning for above the line. However, it also follows the same logic. For instance, above the line in filmmaking refers to the budget for the story writers, directors, actors, and the like. On the other hand, below-the-line is the budget for the rest of the crew and production team. We can also say above the line in marketing when we talk about mass media marketing, and we say below the line when referring to direct marketing.

Polishing the difference between above and below the line

Above-the-line costs are used for creating a product. For instance, they are used to pay for workers’ salaries, equipment, raw materials, maintenance, and the like. On the other hand, below-the-line costs are used to keep the company running. For instance, we have the money we use for a photocopier, human resources, advertisements, accounting department employees’ salaries, and the like.

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