All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad is His slave and Messenger. We ask Allaah to exalt his mention as well as that of his family and all his companions.
The rank of a mother in Islam is very high. The Prophet made her right three times superior than the right of a father on their children. One man came to the Prophet and enquired: "Who is more deserving of my good company?" The Prophet replied: "Your mother". Then the man said: "Then, who?" The Prophet replied: "Your mother". He said: "Then, who?" He replied: "Your mother". The man said: "And then who?" The Prophet replied: "Then your father." [Al- Bukhari and Muslim]
Generally, it is allowed for a mother to act freely in the belongings of her children without their permission. The evidence for this ruling is the Prophetic narration that a man came to the Prophet and said: "O Messenger of Allaah! I have wealth and children, my father is in need of my wealth. The Prophet said: "You and your money is for your father. Your children are the best part of your earnings. So, consume from the earnings of your children." [Abu Daawood]
The above ruling is general which covers the father and the mother.
However, there are two important matters that should be regarded in this concern.
First, the narration does not prove that a father becomes the actual and lawful owner of his children's belongings, rather it denotes that he may act freely in them as pleases him whenever he needs.
Second, the lawfulness of the full authority on the belongings of children is restricted by two conditions: A) The parents should have a need for the money and, B) They should not spend their children's money wastefully or extravagantly.
Therefore, it is apparent from the above details that spending on a mother is a part of being dutiful to her, which is appreciated in Islam. So, she has the full authority in her children's belongings to spend as she likes taking into consideration the above two conditions.
No doubt, if your mother is as you mentioned, she is wrong and committing mistakes by such practice.
We advise you to do the following:
First, supplicate Allaah to make her moderate in her spending.
Second, be patient and lenient towards her, especially since she is in her advanced age.
Seek the help of those who may have influence on her and can advise and correct her.
Fourth, try to please her and be tactful and kind to avoid giving her money whenever she demands it for frivolous reasons.
Fifth, despite her misbehavior you have to be kind with her since her behavior does not justify being undutiful to her.
Finally we inform you that your expression about your father "He now has peace in his grave…" should be restricted by "I think so, etc." since this is an unseen matter and we have to avoid using definite expressions in this regard. We would also like to remind you to show respect when talking about your mother and not to use terms like "…This one...", "...This woman..." as a mother holds a very high status in Islam.
Allaah knows best.