Difficulty: Intermediate | Prerequisites: Introduction to cost accounting, basic understanding of overhead allocation, familiarity with direct vs. indirect costs.
Purdy Call Centers (PCC) is a managerial/cost accounting case study from the University of Texas at Austin. It sits squarely in the overhead allocation and cost system design part of a typical cost accounting course. The case presents a real, messy problem: a service firm whose single-pool overhead system is distorting client profitability, leading to fee disputes, client losses, and strategic confusion. If you have covered direct vs. indirect costs and the basics of overhead rates, you are ready for this. The case is a natural stepping stone toward activity-based costing (ABC), which your course almost certainly covers next.
PCC is a call center outsourcing firm that uses a single overhead rate based on operator hours to allocate all indirect costs to its four clients. After losing a major client (Smith Electronics), fixed costs are spread across fewer clients, inflating per-hour costs for everyone. The result: one client (Krag Wireless) appears unprofitable, contract renewals are under pressure, and the cost system itself may be masking which clients truly consume which resources.
Full time equivalent (FTE)
A unit representing one employee working a full schedule for the year. PCC budgets operator capacity in FTEs and bills clients based on FTEs dedicated to them.
Think of it as: one person-year of operator time.
Fully absorbed cost
The total cost assigned to a client, including both direct costs (operator wages) and an allocated share of all indirect/overhead costs.
In simple terms, this means: the "all-in" cost of serving a client, once you layer on every expense the firm incurs.
Overhead rate (burden rate)
Total budgeted indirect costs divided by total budgeted operator hours. PCC uses a single, firm-wide overhead rate applied uniformly to all clients.
Think of it as: the per-hour surcharge that spreads shared costs across clients.
Direct costs
Costs that can be traced to a specific client without allocation. At PCC, only two categories are direct: operator wages (account 10000) and operator training wages (account 10500).
Indirect costs (overhead)
Costs that cannot be traced to a single client and must be allocated using a cost driver. At PCC, there are thirteen indirect cost categories, including operator benefits, overtime, support staff wages, managerial salaries, depreciation, and communications.
Cost driver (allocation base)
The measure used to distribute indirect costs to cost objects. PCC uses operator hours as its single allocation base for all overhead.
In simple terms, this means: the thing you divide overhead by to get a per-unit rate.
Response Resolution Team (RRT)
PCC's specialist team responsible for documenting undocumented problems, writing step-by-step resolution procedures, developing initial response protocols, and providing product feedback to clients.
Economies of scale
Cost advantages gained when a firm spreads fixed costs over a larger volume of output. A central reason clients outsource call centre work to PCC rather than running their own.
Down time (idle time)
Operator time not spent answering calls or training. PCC targets keeping this at roughly 10% of total available time, and splits it 50-50 between the two clients each operator serves.
Unused operator time (account 20200)
A specific indirect cost category for operator time that cannot be assigned to any client because the operator headcount exceeds current demand. This appeared in 2002 after Smith Electronics left.
Think of it as: the cost of having more staff than you have work for, after losing a client.
PCC is located near Bad Axe in Huron County, Michigan, in the rural "Thumb" region.
Historically high unemployment and low wages in the area give PCC a labour cost advantage.
Cal Purdy founded PCC in 1995, modelling the location strategy after Gateway (rural area, low costs, no sacrifice in quality).
PCC provides superior call centre support to a small, limited client base (six or fewer).
Typical clients are small to medium firms selling sophisticated electronic equipment or software.
PCC only supports US and Canadian enquiries; no international support.
Long-term contracts averaging three years, reflecting high switching costs on both sides.
Economies of scale: many firms lack the call volume to justify an in-house centre.
Non-core competence: senior management views call centre work as necessary but not mission-critical.
Higher service quality: a professional call centre can deliver better support than an in-house operation for firms without the scale.
When an operator answers a call, the entire interaction is recorded for quality assurance and training purposes.
The operator logs detailed notes in PCC's computer system and follows guided, step-by-step problem resolution procedures.
A case number is assigned at the start of the first call. If the caller rings back, any operator can pull up the event log and pick up where the previous operator left off.
The event log prevents the caller from having to repeat their story or re-try failed corrective steps.
The system is far more than a note-taker. It provides operators with specific, scripted guidance on resolving each type of problem.
This means relatively inexperienced operators can deliver effective support, because the knowledge is embedded in the software rather than requiring deep personal expertise.
About 10% of PCC's operators serve as supervisors.
Supervisors handle problems that are either undocumented or too complex for the computer system.
When an undocumented problem is flagged, the RRT is automatically notified.
The RRT reviews the event log, writes a formal step-by-step resolution procedure, and adds it to the system so any operator can handle that problem in future.
The RRT also develops initial response protocols for each client product and provides clients with feedback on problems encountered, helping them improve future products and updates.
PCC considers the speed and accuracy of this feedback loop a key competitive advantage.
PCC had four active clients, all either electronic equipment manufacturers or software houses:
Carlin Software: accounting packages for dental offices.
Gunn Computers: high-end personal computers and gaming systems.
Krag Wireless: high-speed local area networks for small businesses and schools.
Mason Graphics: 3-D animation software for commercial use.
Smith Electronics: departed in 2001 (did not renew; opened an in-house call centre).
Each operator is trained to support two clients at a time.
This dual-client assignment serves two purposes: it smooths demand peaks that vary by client, and it provides spare capacity when operators are ill or on leave.
The firm caps its client list at six or fewer to maintain personalised service while still capturing economies of scale.
Average contract length is three years.
The high initial investment in developing problem resolution software and training operators makes switching call centre providers expensive for both parties.
Satisfied clients typically renew. The market for new call centre outsourcing contracts is thin.
Training is triggered each time a client introduces a new product or upgrades an existing one.
The process: client engineers demonstrate the product to the RRT and select operators, operators discuss likely caller problems, then operators practise on the problem resolution software.
Training consumes about 5% of an operator's time.
Client-specific operator training is tracked separately and directly charged to the client (account 10500).
The salaries of the training department staff themselves are treated as indirect costs.
The centre operates from 8 a.m. to 10 p.m. EST, six days a week (closed Sundays).
Operators are asked to work overtime from time to time. Most welcome it.
Overtime is paid at 150% of normal pay.
The average operator works roughly 10 hours of overtime per week.
Overtime gives PCC flexibility to absorb workload spikes (e.g. new product launches) without hiring additional staff.
Overtime expenses are classified as indirect and allocated across all clients, not traced to the client that caused the spike.
PCC is functionally organised with four departments reporting to the CEO.
CEO, Cal Purdy: founder and president. Has one executive assistant.
CFO/COO, Mary Roby: reports directly to Purdy. Manages a team of two accountants and one assistant. Responsible for the budgetary and cost system.
Operations Department, Fred Thatcher: responsible for scheduling operator time and liaising with the training and RRT departments. Has two secretarial assistants and the operator staff.
Training Department, Cynthia Navarro: ensures all operators are adequately trained and that training staff stay current on client products. Has one assistant and the training staff.
RRT Department, Jack Ryan: heads the Response Resolution Team. Has one secretarial assistant and the programmer staff.
Buildings and Grounds, Dick Morgan: manages the physical facility. Has support staff.
Department heads hire and evaluate their own reports and report directly to the president.
The problems PCC faces are common across any service firm that shares resources among multiple clients: consulting firms, IT managed service providers, law firms, and advertising agencies all confront the same overhead allocation questions. When a major client leaves and fixed costs remain, the per-unit cost for remaining clients rises mechanically, which is exactly the "death spiral" scenario covered in many cost accounting textbooks. Understanding how a single-rate system can distort client profitability is directly relevant to anyone who will manage or advise a multi-client service business.
Students often think PCC's rising costs are caused by inefficiency alone. They are not. A large part of the cost increase comes from spreading fixed overhead across fewer operator hours after Smith Electronics left, not from the firm becoming less efficient.
Students sometimes confuse "operator down time" with "unused operator time." Down time is the normal idle gap between calls (roughly 10% and considered part of regular operations). Unused operator time (account 20200) only appears when the firm has more operators than it needs, as it did after losing a client.
It is tempting to assume that because PCC uses operator hours for allocation, operator hours must be the correct allocation base. The entire point of the case is to question that assumption. Different overhead costs may be driven by different activities.
Students often overlook the 50-50 down time split. Because each operator serves two clients, PCC splits down time equally regardless of which client generated the actual calls. This is a simplification that can distort the picture of which client is truly more expensive to serve.
Be able to explain why PCC's overhead rate has risen over the four-year period, separating the effect of losing Smith Electronics from genuine cost increases.
Understand the difference between direct costs (operator wages, operator training wages) and the thirteen indirect cost categories, and be able to classify each.
Know why PCC uses operator hours rather than operator dollars as the allocation base, and be prepared to argue for or against that choice.
Be ready to discuss how a single overhead pool masks differences in the resources each client consumes (e.g. RRT time, training intensity, communications usage).
The case is a classic setup for an activity-based costing redesign. If your professor asks you to propose a better system, start by identifying the activities that drive each overhead category.
True or false: PCC assigns operator wages directly to clients but allocates operator overtime indirectly. True.
True or false: The RRT is responsible for scheduling operator shifts. False. That is Fred Thatcher's operations department. The RRT writes resolution procedures and provides client feedback.
Fill in the blank: PCC's overhead rate is calculated by dividing total budgeted ______ by total estimated ______. Indirect costs; operator hours.
True or false: Down time and unused operator time are the same thing. False. Down time is normal idle time between calls (~10%). Unused operator time is excess capacity when the firm has more operators than current client demand requires.
Fill in the blank: Each PCC operator is trained to support ______ clients simultaneously. Two.
Q: Why does PCC use operator hours rather than operator dollars as its overhead allocation base?
A: Operators are paid based on experience (experienced operators earn about 25% more than new hires), but operators are not assigned to clients based on experience. Using hours prevents a client from being overcharged simply because more experienced (and more expensive) operators happen to be assigned to it at a given time.
Q: Identify two reasons why PCC's fully absorbed cost per operator hour rose between 2000 and 2002.
A: First, the loss of Smith Electronics in 2001 reduced total operator hours across which fixed overhead is spread, mechanically raising the per-hour rate. Second, several overhead categories increased in absolute terms (e.g. managerial salaries rose from $1,525k to $1,750k; depreciation on equipment rose from $1,750k to $1,950k), adding to the numerator while the denominator shrank.
Q: Explain the difference between how PCC treats operator training wages and the salaries of the training department staff. Why does this distinction matter?
A: Operator training wages (account 10500) are directly charged to the specific client whose product the operator is being trained on. Training department staff salaries are included in managerial salaries (account 30000) and allocated indirectly. The distinction matters because direct charging creates a visible link between training costs and the client that causes them, while indirect allocation spreads the training department's cost across all clients regardless of which one demands the most training support.
Q: What is the "death spiral" risk that PCC faces, and how does the case illustrate it?
A: The death spiral occurs when a firm loses volume (here, Smith Electronics), which raises per-unit costs for remaining clients, which leads to higher fees, which risks driving away more clients, further raising costs. PCC illustrates this: after Smith left, overhead per hour rose, Gunn pushed back on fee increases, and now Krag Wireless is threatening to seek competing bids.
This case connects directly to activity-based costing (ABC), which replaces the single overhead pool with multiple cost pools, each driven by its own activity measure. Most courses use a case like PCC to motivate why ABC exists. It also ties to the concept of cost hierarchy (unit-level, batch-level, product-sustaining, facility-sustaining costs), which helps you classify PCC's thirteen overhead categories by what drives them. Finally, the death spiral scenario links to capacity cost management and the debate over whether to include unused capacity costs in product/client costing.
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