Costs of business above the line
Above-the-line costs refer to the expenses that a company incurs during the production of a product or service. They include raw materials, facilities, wages, and other expenses incurred in the manufacturing of the final product. After these expenses are subtracted from the sales price, a business has its gross profit. Below-the-line cost, on the other hand, include operating expenses that are not directly related to producing a product or service.
Above-the-line cost are generally more variable than those below-the-line. For example, the cost of sales for Nike Inc. in the year ended May 31, 2021, was $37.4 billion, while the cost of above-the-line expenses amounted to $21.2 billion. These costs are included in the cost of sales on the company’s income statement.
Revenue generated by a business is the difference between the total revenue and expenses reported on the income statement. Revenue generated above the line reflects the amount of money that is generated by a business, but does not include expenses that do not have a direct impact on the company’s cash flow or financing. For example, cash received from the sale of company stock is not considered above the line.
Revenue is also referred to as “top line” and is the large number at the top of a profit and loss statement. Managers and owners pay close attention to this number, since it tells how much money the business makes. Many public companies report their revenue on the SEC’s EDGAR database. For example, Tesla’s annual financial statement shows the revenue the company generates. It also provides an overview of how the company spends its money.
Expenses incurred in business are usually recurring and associated with the production of a product or service. On the other hand, expenses incurred below the line are not recurring and are associated with financial transactions and loss events. Both types of expenses must be considered when calculating profit margins.
Above-the-line costs are the expenses incurred during the production of a product or service. They include raw materials, facility costs, wages and other costs necessary for a business to produce its final product. These costs are then deducted from the revenue earned to arrive at the gross profit. After this, the company must account for the operating expenses. These expenses may include interest or taxes.
Creating an effective marketing strategy for your business requires clear communication, a clear message, and a clearly defined budget. Above-the-line marketing creates awareness among a broad mass audience while below-the-line marketing develops relationships with customers and influences their buying decisions. The two marketing strategies can complement each other or be used separately. Marketing experts can offer specific advice on which method of marketing is right for your business.
Above-the-line advertising involves using mass media to target a wide audience. It may involve television commercials, radio ads, or even internet advertising. The most effective way to use above-the-line advertising is to use market research and target the appropriate medium for your business.
In recent years I’ve spent a lot of time speaking to and consulting with builders and remodelers, big and small, and I’ve noted that there’s often confusion about what types of costs go where on a financial statement. On a typical P&L (profit and loss statement),
the costs are segregated into two types: cost of goods sold (COGS) and overhead. COGS consists of the costs directly related to producing jobs. Accountants call these “above the line” costs. Overhead items, or indirect costs, go “below the line.” The “line” that differentiates these costs is the gross profit. To arrive at the gross profit, above-the-line job costs are subtracted from job income or selling price. To get net profit, overhead cost — below-the-line — are subtracted from the gross profit.