I've tried many suggestions on how to make scrunchies. The best "instructions" that I got were from Lisa Reeves, who posted her formula to alt. sewing. Here's what she suggested:

Cut the fabric 20-22 inches long and 4 inches wide. (1/8 of a yard will make two scrunchies). Sew the fabric together, right sides together using a 1/4 inch seam allowance.

Cut 8 inches off of 1/4 inch elastic. Turn the tube right side out. Using a safety pin, secure the elastic to the tube as you insert it. Next, knot the elastic ends together. (Knotting the ends is much faster then sewing them and is very effective).

Afterwards, take on end of the tube and cuff it to the inside. Tuck the other end inside the tube, and just sew across.

Ta da! The perfect scrunchie!