I once found a home baker in NH that offered a Party option where kids got to decorate their own cupcakes. I can't find her business anymore though!
I loved the idea and had thought about it, myself. Has anyone done this and can provide tips on what to provide as a "kit", and of course what to charge for the service?

How you price it will depend on what all you offer.

You need to figure out what you would want to teach them or have for them to 'play' with.

Will the supplies be disposable, or something you will keep and use again (such as rolling pins for fondant)? For items you would leave them or that are disposable, I would charge them full price for it. If it is items you will take with you when you leave, you do need to have a fee in there to cover some of the cost of them. The more 'parties' you do the sooner those will be paid for and you will end up making more money from the parties.

How long would you make the party? How long will it take for you to prep for it? Are you going to be respondsible for clean up? How much is your time worth an hour?

From what I've seen and heard, most bakers don't like it. The kids end up throwing icing and cake everywhere and it is just a big mess.