My daughter and nephew always LOVED sewing on plastic canvas with yarn. Depending on their age you can get those big plastic needles.
They made decorations for every holiday, gifts for parents/grandparents/teachers/etc.
You can cut any number of designs out of plastic canvas. Once they get adept at it they can start making baskets, doll furniture, book covers, anything they can imagine.
Plastic canvas is very cheap and you can always find yarn on sale and it doesn't need to be high quality, plus a little goes a long way.