Final answer:
Direct labor is not considered an overhead cost but a direct cost attributed to the production of goods or services, whereas machine setup, product assembly, and quality inspection are types of activities that contribute to overhead costs.
Step-by-step explanation:
In the context of accounting and cost management, different types of activities can contribute to a business's overhead costs. Among the options provided, machine setup, product assembly, and quality inspection are activities typically associated with overhead costs. These costs are often indirect and cannot be directly traced to a specific product, hence they are allocated to products based on some method of overhead allocation.
On the other hand, direct labor is not considered an overhead cost. Instead, it is a direct cost that can be directly attributed to the production of specific goods or services. Direct labor costs are variable and fluctuate with the level of production output.
Substitution of Labor and Physical Capital
Firms may adjust their mix of labor and physical capital in response to fluctuations in labor costs. For instance, when faced with union demands for higher wages, a firm may opt for production methods that involve more machinery (physical capital) and less labor, thereby enhancing labor productivity. This is illustrated by hypothetical examples where firms choose the most cost-effective combination of labor and machines for producing goods or providing services.