On the patches I sell, I use images or scans of the real patches. I got the 1/1 dimensions and shrunk to 1/6. Adjusting colors if I needed to. I think they look more realistic then the created images used by others do not look realistic. When you use the real deal, even at 1/6th you can see the detail of the embroidery in the patches.
For material, I use June Tailor Quick-Fuse. Its white, iron-on cotton ink jet sheets. Its around $7-10 for 3 sheets depending where you get it. I believe they also make a non-iron-on version.
I do have some patches left over from my last run. Soko Toys also sells my patches if you are interested in buying some. They have a nice sampler for a great price. I'm also doing a custom run this weekend or sometime in the next 2 weeks if you were looking for something custom.
“People sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf.”