itinerary suggestion.

Are you aware that there is a former concentration camp near Munich (Dachau), also mentioning that Auswitz was an extermination camp. It would save you travel time in Europe. Be cuatious with your kids. Dachau defines minimum age of visitors on age of 14 but it is less a question of years, more a question of empathy and how much you are able to keep a distance between you and what you see.

With three more days you can explore Vienna or Nuremberg or even go for a nice hike in Bavarian pre-Alps - depending on date / season of journey.

So I am of several minds about this. First, some quick questions:
1) You say you have 12 days, including the day you arrive. That means you land in Krakow on Day 1. What time do you land? Do you leave on Day 12? Then Day 12 is gone. You only really have 10 full, not-jetlagged (hopefully) days.
2) Have you bought tickets yet? If so, from what city are you flying out? Please do NOT by a round trip ticket to Krakow. Buy open-jaw/multi-city.

Now, the itinerary.

I love Krakow. It's a wonderful city. It's also not great with train transportation; it takes longer than it should to get anywhere. So if you're thinking of going from Krakow to Munich, you'll need to fly. It's a 12-13 hour train ride, with 2-3 stops on the train; the plane will get you there in 75 minutes,

IF YOU WANT TO KEEP MUNICH AND SALZBURG:
I'd suggest adding Vienna. There appears to be a night-train that leaves Krakow at 22:34 and arrives Vienna 7:00. Double-check this; I just put in a dummy date. But that would be an option. It's also an hour by plane, or 6-7 hours with a transfer by plane.

Honestly, I don't care much for Salzburg; I've had unpleasant trips both times I've visited, am not a huge Mozart fan, and basically think the best part of the city is Bob's Sound of Music Tour. BUT - I know I am in the minority here. Were it my vacation, I'd stay the night in Hallstatt. But it is your vacation; still, I'd take a day from Salzburg. So the trip would look like this:
Day 1: Arrive Krakow. Get settled, walk around town.
Day 2: More Krakow - Main Square, Wawel, Salt Mines, whatever you fancy
Day 3: Auschwitz. Leave on night train for Vienna.
Day 4: Arrive Vienna, store luggage, explore city
Day 5: Vienna
Day 6: Vienna
Day 7: Train to Salzburg. It's about 2.5 hours, so depending on how early you are willing to get up, you could be there by or even before noon.
Day 8: Salzburg, Day trip to Hallstatt
Day 9: Train to Munich; train is 1.5-2 hours, so again, you can be there before noon.
Day 10: Day trip to Neuschwanstein. I'd suggest taking a tour, which also takes you to other palaces and towns. But it will take allllll day.
Day 11: Munich
Day 12: Fly home from Munich.

There are multiple ways to organize a trip like this. You could even drop Vienna and just add days to Krakow, Salzburg and Munich. Again, Krakow is hard with the trains. As an off-the-wall option, you could do three nights Krakow, three nights Warsaw, and then five nights in Berlin. Or Krakow-Vienna-Budapest. Or Krakow-Prague-Munich. It all depends on what you want.

The above plan gives you enough time to do the top 3-5 things you want to do in each city - which might be enough for you. And if you travel hard and fast, you might be able to do more. I squeezed a LOT into my first trip to Vienna, which was pretty much the amount of time you'll have - but I was solo, so I didn't have to worry about anyone else. But, please - FLY OPEN-JAW. Determine how many days (or, better, nights) you actually have on the ground. And take into account the time it will take to transfer between cities - not just the train, but getting to the station and then getting to your hotel.

Have a wonderful trip!

Thank you so much for all the suggestions, very helpful suggestions for itinerary. Will explore your suggested itinerary of krakow prague munich or krakow vienna budapest or dropping krakow and spend few days at nuremberg . The kids are very interested in world war 2 and cold war history, so instead of krakow even berlin is an option.
will also have to think if it be suitable to take the kids to auschwitz, but if we visit krakow, auschwitz is too important .

Berlin is 4 hrs by train from Munich, Nuremberg is a stop in between.

What time of the year are you planning your trip?

Planning a trip in may 2020, think will just stick to germany and salzburg in austria. We book the air tickets by dec.