My philosophy (based on the "Positive Discipline" approach by Jane Nelsen) is that consequences should be used to help children learn for the future instead of pay for the past. In the example above, a simple removal of the video game (because difficult child wasn't using it appropriately) would suffice. As soon as he is able to use it appropriately, he can have it returned to him.
As far as your cousin goes, simply tell her you took care of it. She doesn't need to know the specifics of how you discipline. While I know it's a sensitive subject for her, the only "perfect" parent is the one who doesn't have children of her own.
