First of all I'm no expert, but from all I have read and all that I know about life, masterbation is perfectly normal. 12 is also probably about the age where boys (and girls) start to explore their sexual identity. You should not be concerned about it that much in my opinion. (Ask your husband what he was doing at 12! LOL)
Calling your son out or "confronting" him is the worst thing you can do. Perhaps the reason he makes up stories is that he doesn't feel he can come to you and talk without reprisal.
I know when my son gets to be that age I hope I have laid a foundation of MUTUAL trust so that he will feel free to come to me with his thoughts , dreams, and even failures.No matter what they may be. And yes, I too want to raise a child who is respectful, pleasant to be around and well adjusted. However I do know that sometimes the dreams of a child and the dreams that a parent have for them are not necessarily one and the same.
Good luck with your decision.