Timing dynamically is fairly simple and is the best way to time your engine. Static timing is good for a baseline adjustment, but real accuracy requires a timing light. You can get a timing light for about $30 at Wal-Mart, so it's not a big expenditure and is a wise investment. To set timing you will also need a tach/dwell meter.
The first step to setting your timing is to adjust your valves. Valve adjusting is to be done on a stone cold engine and is a topic for another procedure, but John Muir explains well how to do it in his Idiot book. If you have a '78 or later Bus with hydraulic valve lifters, you can skip this step.
Once that's done, you need to adjust your points. NEVER set the timing before setting the point gap. Changing the point gap changes the timing.
Once that's done, you can proceed to set your idle speed. Do not adjust the timing until you've adjusted the idle speed to specifications (usually between 800 and 1000 rpm on the VW engine). Idle speed adjustment can only be done on a warm engine. This is where you need the tach/dwell meter.
OK, now that you've done all the above, you can mess with your timing. First look at your timing light. You will see two alligator clip type leads and a black box lead. The two alligator clip leads are for power and ground for the timing light, red is power and black is ground. the black box is the inductive pickup. You simply clip the inductive lead over the spark plug wire for the #1 cylinder (cylinder numbers are stamped on the tin next to each cylinder). OK, so you've been out driving and the engine's all nice and warm and you just adjusted your idle speed to spec. OK, turn off the engine. The first thing you'll want to do here is mark the timing notch on the pulley with something to make it more visible. Chalk or white-out do wonders. You can crank the engine around with a wrench on the alternator nut to bring the timing notch into view, and then mark it with chalk or whatever.
Now, hook up your timing light. Clip the power lead to the + terminal on the battery or the + side of the coil (make sure it's the + side or you'll blow that sucker -- ask me how I know). You want to hook the power lead of the timing light to the terminal on the coil that the condenser does NOT connect to.
Clip the ground lead to a good ground. Hook the inductive pickup on the #1 spark plug wire and then start the engine.
Also, at this point, if your engine needs to be timed with a vacuum hose disconnected, this is a good time to disconnect and plug it. Pencils make good plugs.
Now, you've started the engine. Let it idle, check your idle speed again just to make sure it's within spec. OK, pull the trigger on your timing light. You should see the strobe flash in time with the engine. If not, check your ground. Some places that seem like good grounds really aren't. Now, point the strobe at the crankshaft pulley. You should be able to see the strobe highlight your timing notch. Then look where it is in relation to where it's supposed to be. On a Type 1 engine, the notch is supposed to line up with the crack in the engine case (case seam). On the Type 4 engine, the notch should line up with the proper number on the plastic timing scale. If it doesn't, you need to make the adjustment.
What you do now is get out your 10mm wrench. Look toward the bottom of the distributor, you will see a clamp that goes around the distributor body with a 10mm nut holding it closed. Loosen this 10mm nut a bit and slowly turn the distributor body by hand while watching the timing mark in the strobe light. As you turn the distributor body, you will see the mark move and probably hear the change in engine speed. Turn the distributor so the mark moves to where it's supposed to be and then tighten the 10mm nut.
That's it, you've timed your engine!!
As an addendum to this topic, I've had a couple people ask me questions about timing a Type 1 engine which just has a notch in the pulley. I've been asked what value the notch represents.
The best answer I can give you is that it depends. First it depends on you having the correct pulley for your engine, which is not always the case. Secondly it depends on the year of your engine what the timing spec is. Your best bet is to look in the Bentley manual for your year and find your timing spec. It should show you what the different notches stand for for that year. Some have only one notch, in which case that's the notch that should line up with the seam in the crankcase, however some have 3 notches which represent different timing settings. Consult the manual to be sure.
If you have a Type 4 engine, this should not be an issue. A Type 4 engine has a plastic or metal timing scale attached to the fan housing right by the pulley. You just line the notch up with the correct number on the scale. If your timing scale is missing, go buy a new one. They are still available.