Are the questioner and her daughter considered hypocrites and the cause of the dispute between the two families, and what is advised for the questioner and her daughter?

Advising your sister about her daughters' objectionable actions is not hypocrisy; rather, it may be obligatory to change the reprehensible, for the Prophet, peace and blessings be upon him, said: "Whoever among you sees an evil, let him change it with his hand; if he cannot, then with his tongue; if he cannot, then with his heart—and that is the weakest of faith." One should persist in offering advice gently and wisely, and maintain ties of kinship unless boycotting becomes a means of reform.