I've always adored the simplicity of wooden peg people. They really are a blank slate that a child can customize in so many ways. One morning I quickly cut up some fabric scrapes and yarn, then put out a variety of bottle caps and buttons. Then the fashion designer came to the rescue to cloth these poor peg people.
Peg people (I bought mine on Amazon).
Glue (stick or school glue)
After you set out the materials let your children explore and create their own ideas. I often find that my 3 year old has lots of ideas but has difficulty making them "come to life". I helped a bit with the gluing and cutting. Aside from that, Annabel was involved in this activity for about 30 minutes.
Will you wrap fabric for dresses? Make belts of yarn? Maybe your peg person has a button hat? There are so many ideas! Let's see YOUR peg people!