All the other posters have wonderful ideas!
Having done this before with several preschool and younger children, it is a mess. I can live with a mess, but the sugar rush that follows is pretty hard to take! So our family evolved the cookie decorating day to a Xmas ornament decorating day.
Have healthy treats available, but give the kids a bunch of pre-baked, hardened clay-dough "cookies" to decorate.
Recipe:
2 c. flour
1 c. salt
2 tbsp oil
3/4 c. water
Mix, shape, bake at 200 degrees until hardened.
Then let kids decoarte with washable markers, water colors, crayons, or anything else. Hang on Xmas tree. Give away as presents. You may want to have some unbaked clay-dough around for kids to play with, too. If they try to eat it, they'll stop after one taste!