I think you can achieve this with vanilla and micro-ing stockpile-workshop connections. As for doing the mod thing
[IMPROVEMENT:<probability>100:<reagent name, often A or B>A:<improvement type>COVERED:<material token, can use material classes to make the reaction only choose materials with that class>]
The things outside of <> is what I recommend for a start. Here's a more complete one with less obvious info.
[REACTION:ENCRUST_WEAPON]
[NAME:encrust a weapon]
[BUILDING:CRAFTSMAN:NONE]---At craftsdwarf workshop
[REAGENT:A:1:WEAPON:NONE:INORGANIC:NONE][PRESERVE_REAGENT]---the INORGANIC:NONE means it must be made of a material whose ID goes INORGANIC:X
[REAGENT:B:1:SMALLGEM:NONE:NONE:NONE][REACTION_CLASS:ENCRUSTING_GEM]
[IMPROVEMENT:100:A:COVERED:GET_MATERIAL_FROM_REAGENT:B:NONE]
[SKILL:ENCRUSTGEM ]
you'll need to add [REACTION_CLASS:ENCRUSTING_GEM] to the gem-able materials you want to encrust with.
Making gems unable to be encrusted is impossible, you can even cut rock and encrust it on things.
When the product is finished; is it possible for me to 'change' the values of the item, making the item better? I.e. decreasing the impact area of hammers for better penetration but not actually changing the material the base weapon was made from(I'm guessing it's just an easy raw edit but I'd like to confirm this).
No, it is not possible to make the product better after improvements. To make it better you need to change the base weapon which is only possible by destroying the old one + all improvements and makes a new one.