Set during Halloween, the game features a boy who must rescue his sister from a sweet-toothed monster by battling creatures in suburbs, a carnival and a mall, according to 1Up.
The title will include adventure and role-playing elements, with candy wraps as experience points and cards as collectibles for achievements and costume unlocks.
The player can also undertake mini-quests and recruit other children for difficult missions.
Costume Quest is one of four titles in development by the studio, two of which will be published by THQ.
The downloadable game will be released later this year on Xbox Live Arcade and PlayStation Network.
Founded in 2000 by Tim Schafer, the studio has previously worked on Psychonauts and Brutal Legend.