I have made my entire train layout and various mountain dioramas following this method. You can also make undulating landscapes, cliffs, whatever. Super easy. Actually, it is hard-- to do it incorrectly. Seriously. What you need...
1. Sculptamold
http://www.dickblick.com/products/amaco-sculptamold/
A 3 lb bag goes a very long way. I wouldn't recommend anything bigger because you probably won't be plastering an entire room with it.
2. A bottle of acrylic flat earthtones (browns, greens). You can decide what color for your scene. 1 bottle goes a long way as well.
3. Empty spray bottle. (Windex like bottle with sprayer) water
4. Options a plenty: traditionally you would use newspaper rolled into balls and rolled screen from a hardware store. Make tons of news balls and lay the screen over it in undulating patterns. Staple. Then mix a small part water and sculptamold and lay it on either with a puddy knife or your hand. Let dry. Experiment with water mix, it always comes out real and interesting.
Option super easy. Take styrofoam from any package-especially the larger pieces with nooks and valleys. Break up the corners and edges for a more rough real look. mix your sculptamold and water and lay it on.
5. When dry mix the paint and a very very small amount of water in the spray bottle. Just spray it on the mountain. fill in crannies with a brush. let dry
6. Optional. Add scenic grass or bushes or ballast if you want. It will look good either way.
Check my train site for more details and visuals:
http://mysite.verizon.net/vze12k648/