We've had a "decorate your own cupcake" station at their parties for the last couple of years (with the exception of O's Little House on the Prairie party), and it's always a big hit with all of the kids.
Usually, I splurge on lots of surgary, dye-filled pre-made icing, but this year my mom made deeeeeeelicious homemade icing that we dyed in several different colors (so, we still had our fill of artificial dye, but at least we could pronounce the other ingredients :)
About a week before the party, we were helping my sister move to her new house, and I found the perfect icing containers and tips. Luckily, she didn't mind us borrowing them :)
My mom and the girls made the cupcakes, and we set them up on cupcake stands on the morning of the party. O(6) wanted to know why we bothered with the white icing, and I said that it was so they'd have a blank canvas to make their icing art, but she pointed out that it's really not necessary...she's right, and it will be less work for us (ummm, I mean, my mom!) for next year.
E(3) spent a LONG time decorating her cupcake. She was thoroughly engrossed in the activity. She ate very little of her creation (thank goodness) and said that she was going to nibble a little bit each day. She ate a little each day for about 3 days before she forgot about it!
We had leftover cupcakes and icing, so this was a fun rainy day activity for the girls! Luckily, it's all about the process and not the product, and they ate very little of their creations :)