Oh, to be a kid at the beach!

Step 1: Be Prepared

To relive my childhood in edible form, I used:

2 red velvet cake mixes and what the box calls for
baking pan (13.25"x9.25"x0.625")
Stein (inner dimensions: 3.25" diameter, 6.25" height)
food coloring
buttercream icing (2 batches*)
4 c. powdered sugar
1/2 c. butter, softened
1/2 c. shortening
1 tsp vanilla extract
2 tbsp milk
large surface to make the beach on (I used an unused pizza box) something disposable would be best

*I tend to use a lot of icing when baking, so you may not need quite as much

Warnings and Safety Cautions
Always use caution when dealing with high temperatures.
Use proper equipment when handling hot objects.

Alternatives
There's not only one way to do anything... and this is no exception.
You can make cake from scratch, use icing from a can.
I used a stein because the inner volume is very nearly a cylinder, unlike regular glasses that slope outward from the bottom. Instead, you can bake the cake in any kind of pan and simply cut out circles and stack them on top of each other.
Similarly, you can use a different size pan and make your walls a different size.

Step 2: Making & Baking

Preheat the oven to 350 deg F and prepare the batter as directed.

For the walls - you will need 2 of these forms
Fill the pan just over half way, leaving room for expansion. Smooth out the batter so it will bake as flat as possible.
Bake for about 15 minutes.

For the towers - you will need 4 of these forms
Grease the stein and fill it to about 3" high; it will expand to about twice its original height.
Bake for about 30 minutes.

You can make the towers the same height, though it's not necessary: it's a sand castle. Personally, the walls and towers of my castles all looked different.

I would have used actual beach toys to bake, but there have been some rumors floating around that plastic melts under high temperatures... So I just stuck with the tried and true glass and metal.

Step 3: Icing

Mix the powdered sugar, butter, shortening. Add the vanilla extract and milk. More milk may be added to make the icing creamier.

Step 4: Wall Assembly

Cut each of the flat cakes into 8 equal strips. You should have 16 cake strips.

Make 2 stacks of 8 strips with a layer of icing in between strips.

Cut each of the 2 stacks in half. You now have 4 walls, each 8 layers high.

Step 5: Castle Assembly

Arrange the walls in a square with the cylindrical towers at each of the corners. Attach everything with icing.

Then cover the whole castle with icing. I added ~10 drops of food yellow coloring to the icing to get my yellow sand.

Given the nature of sand, perfection is not necessary. I think imperfection adds to the effect...

Step 6: Making the Beach

As you can see in the picture, some of the crumbs get stuck when you spread the icing. Since I used red velvet, mine is slightly red, so it adds to the beachy effect, because sand generally isn't just one color. Using different kinds of cake will add different effects (i.e. Funfetti will have colorful crumbs that are little seashells).
Spread yellow icing in the center of castle as well as around the perimeter. Sand is everywhere, and it can get messy.

Step 7: The Little Details

The Ocean:
Add a few drops of blue food coloring to the icing, but do not mix it in all the way. Spread it in front of the castle so it meets up with the sand to create the shoreline. If you feel like you mixed the blue in too much, add a drop or two of blue on top of your ocean and use the back of a spoon to spread it.

The mermaid tail:
Get a heap of green icing and form into the shape of the tail, at the edge of the ocean.

The Shovel:
Add blue and red food coloring to get purple icing. Shape into shovel form.

The Crab:
Add more red food coloring to the purple icing. This will not make it entirely red, but it will give it a reddish tinge.
For a light, more pink crab, mix red food coloring into the white. Because color has a physical limit, you cannot get a perfect red by mixing red food coloring into white icing. To get a deep red, mix red food coloring into chocolate icing. For a duller red, mix black food coloring into white icing, and then adding red food coloring.
And then shape the icing into a crab.

The Sand Dollar:
White icing in the shape of a sand dollar.