Yes, by all means tell the girl's parents. You can imagine how this might be if the shoe were on the other foot, so to speak. You would want to know what happened.
Now, you've already learned the most important lesson - do not expose your child to material, information, experiences that are over-stimulating and inappropriate.
Relative to dealing with your son, set a clear, simple, direct, non-punitive limit on the sort of behavior in which he engaged. Simply put, let him know it is not acceptable to touch other people in the manner he did with his cousin, whether the other person is male or female. Exposing one's genital area or buttocks is not permitted, nor is it permitted to permit another person to touch one's genitals or buttocks, and it is not permitted to touch another person that way.
He is old enough now that he should not be bathing with another child, so it would make sense to agree with his inclination. At this age, bathing together is an invitation for inappropriate touching. He'll recover from this fine - let it be a lesson learned.
I agree your wife need's to tell her sister and make sure your son never does this again to a cousin.