Allocating common costs to joint products by two methods—relative sales value and relative BTUs. The Lone Star Petroleum Company owns a lease on a well that produces both crude oil and natural gas. During the year 19X5, the well produced 2,800 barrels of oil, which were sold at $16 per barrel, and 80,000 mcf. (thousand cubic feet) of natural gas, which were sold at $1.50 per mcf. Total costs of producing the oil and the gas were $12,000. Two proposals have been made for allocating the costs of production between the gas and the oil.

1: On the basis of relative sales value.

2: On the basis of heat content, measured in British thermal units (BTUs). Each barrel of oil contains about 6 times as many BTUs as each mcf. of natural gas.

Instructions 1. Compute the total cost and the cost per unit to be allocated to gas and to oil under each of the proposed methods. Round off the unit costs to four decimal places.

2. Briefly compare the effects on costs of the two bases. What factors should a cost accountant consider in choosing a basis?