Leroic's Shinbone Act: 1 - Found Inside of the fireplace in Leroic's Manor (Click on the burnt logs)
The Black Mushroom Act: 1 - Found in the cathedral, most commonly floor 1 (Click mushroom pile)
Liquid Rainbow Act: 2 - Inside of a mysterious cave in act 2 (Dahlgur Oasis)
Wirt's Bell Act: 2 - Bought for 100,000 gold from Squirts in the Act 2 Bazaar
Gibbering Gemstone Act: 3 - Drops from Chiltara in the Caves of Frost(Found after Bridge of Korsikk)
Plans: Staff of Herding Act: 4 The recipe to craft the staff is a drop from Izual (Act 4 Boss)
Once all 6 items are obtained, open the window of your blacksmith and right click the pattern to learn it, you can now craft it under the weapon section.
Now that it is crafted, you must visit The Ghost of the Cow king on Old Tristram Road in Act 1, he will have a brief dialog with you and then open the path to Whimsyshire, the magical land of rainbows and ponies.
About 1-2 hours to completely build the staff, including research time. However, there are many reports of farming for 2-3 hours for a single piece of the staff, so the total time seems to vary greatly with luck.
To obtain the most basic form of the staff (normal version) it costs 150,000g. It then costs an additional 200,000g to build the nightmare version of the staff, 500,000g for the hell version of the staff. Currently the inferno version price is unknown.
You can use the staff as many times as you wish.
The secret level is just as difficult as Act IV of the current difficulty. It scales as more players join just like any other level.