I have made several rag quilts and have experimented with several cutting measurements to obtained a fluffy edge. I have found that using one layer of flannel instead of batting and having the middle flannel layer the same size as the from and back squares works best. I sew the edges at least 5/8 inch around and cut at least 3/4 inch for the ragging.
After several washings the quilt fluffs how I like it.