Final answer:
Firms utilize activity-based costing to improve planning and control, assigning costs based on resource consumption. This method, alongside analysis of fixed and variable costs, assists in making strategic decisions for profit maximization.
Step-by-step explanation:
Firms can improve planning, product costing, and control by using activity-based costing to develop a detailed description of the specific actions performed in the firm's operations. Activity-based costing is an accounting method that assigns costs to products and services based on the resources they consume. This method helps in understanding the indirect costs associated with different products and services, which can improve pricing and product mix decisions. Using this approach, firms can more accurately determine the overhead rates and understand the profitability of specific products, enabling them to make better strategic decisions. In essence, it aids in examining how changes in production affect marginal revenue and marginal cost.
Additionally, firms seek to understand their cost structure by dividing total costs into fixed and variable costs, utilizing these calculations to discern average total cost, average variable cost, and marginal cost. The careful analysis of these cost measures alongside the sales and revenue data is crucial in arriving at profit-maximizing production and pricing decisions, especially from a long-run perspective.