I posted this the other day to someones query on making fret markers. And I recently updated my on-line notes. Here is a link to my method for making some good looking yet inexpensive fret markers.
http://www.sledbag.com/splooft/dots/
—Brendan
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I actually built a tool just like that a number of years ago, I think to patch up a peghead hole I drilled wrong. I made a rough tapered piece of maple on the belt sander then refined it in the tapering tool.
However, for fingerboard dots, I have a selection of brass tubing. I cut off say, an inch and a half length, and take a Xacto saw to make 6 short vertical slots in the end. This makes it act like a hollow cutter. Then I chuck it up in the drill press, and drill into a piece of scrap rosewood board. It will cut a perfect circle.
You have to unchuck it and use a small file or something to ram the piece of wood back out of the tube. Rechuck and repeat. For a 1/4" dot, you would use a slightly larger size of tube.