First, pick your sleeve. You can use a solid color or stripes, or whatever works for your monster. Cut off the sleeve, trimming the part near the shoulder so it is even all around (like a giant sock).

Next, plan your head. There are many different options, but here are a few ideas.
1) Square - just turn inside out, and sew the cuff together in a straight line.
2) Curved - sleeve inside out, trim a curved line, and stitch together.
3) Fluffy - The Fluffyhead (pictured right). With sleeve right side out, gather a few inches from the top. Weave thread back and forth, and pull tight. Afterwards, you can cut the cuff to resemble hair!

A couple of considerations:
*You can attached some scraps or padding in the inside of the top of the head. This would help the head stand up better on a small hand.
*You may want to have felt strips to be 'hair' or 'feathers' stick out of the top of the head. To do so, place long strips of felt INSIDE the inside out sleeve, so 1/2 inch sticks out the top. Stitch the top closed with the strip sandwiched between.

You'll also need a mouth. Cut a slit in the 'face' of your monster where you want the mouth to go. Cut out a circle or oval of contrasting fabric. Line it up with the slit, and stitch around, gathering as needed.
The Fluffyhead has a mouth with lips, created by turning the puppet inside out and stitching an oval of fabric on the inside.
The People Eater's "scary" mouth was done by whipstitching on the mouth from the outside.

The rest is all embellishment and adding personality.

Arms: Since ours were for 3.5 year olds, we decided against arms, as they are hard for small kids to manipulate. If you like you could just stitch on non-functional arms.
Horn: For the people eater, I made the horn by cutting out a half-circle of sweater fabric, and wrapping it into a cone. Overlap the edges to make skinnier horn. I stuffed it with a few fabric scraps and stitched it on top of the head with a whip stitch.
Eyes: Sew on buttons, press on toy eyes, cut fabric circles for eyes... For the People eater I used a fabric circle cut out of felted sweater, made a hole in the center for the post of the toy eye, and pressed it through. Then I used a blanket stitch to attach the felted circle to the head.
Nose: The Fluffyhead had a couple of felt circles bunched and stitched on in the center. You could also do buttons, or whatever.
Other: I cut out wings out of sweater material and used a simple straight stitch to sew them to the sides of the People Eater Body. For the Fluffy head, we attached a felt star to the belly using a whip stitch.

Hope you enjoy this and it gives you some ideas for a fun evening of puppet making!
To see more pics of how we made these, visit my blog: http://www.dabbled.org/2009/04/how-to-make-silly-sweater-monster.html