I could not agree more.I would cut her off from him for a while. I know it sounds harsh but she is OBVIOUSLY having some sort of power pay over YOUR children. They are YOURS and NOT HERS and she needs to realize that. Also, your DH needs to step up and make sure that she knows he also felt it was out-of-line!
Wrong. Wrong. Wrong.
If she asks..."You CUT his hair, I'm CUTting you off!" It IS the principal of the thing...that she has the audacity to think she could alter him w/out your permission.