Above-The-Line Costs

Above-the-line costs refer, literally, to: 1) costs above the line that separates gross profits from operating expenses, or 2) costs above the line that separates operating income from other expenses. In the first case, these costs are generally considered cost of sales (COS) or cost of goods sold (COGS) for companies that manufacture products. Utilities and companies in the service sector consider expenses above the operating income line as "above-the-line" costs.

For manufacturers, above-the-line costs is 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" expenses.) Companies that provide services display sales and expenses on their income statements. Anything above the operating income line are what would be referred to as "above-the-line" costs.

For simple illustrations, take three examples:

1. Nike Inc. reported $8.55 billion in sales in its third quarter of fiscal year 2017. Gross profits were $3.68 billion. Therefore, Nike's above-the-line costs for the quarter were $4.87 billion, which the company labels Cost of Sales on its income statement.

2. Expedia Inc., the travel website, reported $2.32 billion in revenue in its third quarter of 2017 and operating income of $113 million. The company is not involved in the production of goods, so there is no COGS or COS for a gross profit calculation. All expenses before operating income are above-the-line costs.

3. Public Service Enterprise Group Inc. (PSEG), a utility company, showed operating revenues of $2.26 billion and operating income of $693 million in Q3 2017. Above the operating income line lay the major costs, which the company detailed as energy costs, operation and maintenance, and depreciation and amortization.