This is how I made a small hand carved wood sign from katsura (Japanese Judas tree wood).
Katsura is a popular wood used for relief carving in Japan.
(Click on the [i] at the top left of photos to see an enlarged version.)

Materials used
- One 11 x 22 cm piece of Japanese Judas wood (2 cm thick)
Cedar, cypress, and bass wood are also good for carving. Make sure you select wood that has no knots.

Tools used
- Handheld jig saw
- Router (Dremel tool with router attachment in this case)
- Assorted chisels
- Sandpaper (180, 400, 800 grit)
- Black enamel paint ("1 Shot" is best, but any exterior type will do)
- Clear varnish
- Small brush for varnish

Step 1: Design the Layout of the Sign

The next step was to design the sign layout on the computer. I use CorelDraw, but any graphics program, or word processor such as MS Word for example will do. Make sure you leave enough white space between the lettering and the edge of the sign.
Cursive or script fonts can be harder to carve, and I happen to like Copperplate which was used on this sign. Fonts with serifs (the little "feet") can be hard to carve, but the serifs in the Copperplate are quite small. The size of this sign is 11 x 22 cm.

Before transferring the design, I first prepared the surface of the wood by sanding, starting with 180, 400, then finishing with 800 grit for a smooth finish. Wrap the sandpaper around a small block of wood, or use a small electric sander for an even finish.

Step 2:

Once I had a layout I was satisfied with, I printed it out with outlines only. If you cannot print outlines only, solid text will work, but it is a bit more difficult to transfer.
There are many different ways to transfer the design to the surface of the wood.
I go with the traditional method of carbon paper and trace the lettering (using a red or other coloured pen makes it easier to see what you have traced).

Another way is to print your image in reverse with a laser printer (or copy an inkjet image with a photocopier), brush it with acetone (apparently nail polish remover may work), then burnish it using a spoon to transfer it to the wood surface.

Step 3: Carving the Sign

The next step is to start carving. I used a simple straight edge chisel for most of the carving (top chisel in the photograph below).

A few pointers:

Always make sure your chisels are as sharp as possible.
Avoid carving toward your body.
Never put your thumb, or fingers in front of the chisel.
Clamp the piece of wood, or use a support at one end so it does not move around. I find that putting a thin non slip rubber mat (I use this mat) under the wood works as well.

For v-incised lettering (cut is v-shaped), a v-shaped chisel can be used, but I have found that it will almost always have problems when you cut against the grain. Carving takes time, so I would recommend practicing on scrap pieces of wood first.
I will not go into detail regarding how to actually carve as it is best if you find the method that best suits you, and there are lots of tutorials and videos dedicated to how to carve.

Step 4: Finishing the Sign (paint And/or Varnish)

Once the carving was finished, I cut the curved corners with the handheld jig saw.
Next I used a Dremel tool with a router attachment to put a rounded bevel around the edge.

I painted the cut out lettering with black enamel, then brushed on several coats of varnish (lightly sanding with 800 grit sandpaper between coats). For outdoor signs, most varnish will eventually fade and peel, so I would recommend using enamel paint for the surface of the sign as well (and no varnish).
If the sign will be indoors, stains and/or tung oil etc. can be used, and varnish will last virtually forever indoors (unless it is located in direct sunlight).

Good luck with your sign carving endeavours!
I have a few photos of other signs etc. on my carving and sign blog, including hand routed signs.
(I might make an instructable in the future on hand routed signs.)