There are 2 main "villages" at Sun Moon Lake - ShueiShe and Itashao village. ShueiShe is the one that most of the buses arrive in, and also contains an impressive Visitor Centre. It is a tourist town where most of the resorts are in. The more expensive ones are situated right by the lake, and makes for a really nice stay. Itashao is the village where the original Thao tribe resides. The Thao is Taiwan's 10th and smallest aboriginal tribe. Now they are just a small community living in a settlement off the main village.
There are feeder buses that go around the lake, with designated stops along the way. You can also do a quick tour by ferry to a few major points around the lake. There are also quite a number of treks you can do round the island too. All these are well documented in the Visitor Centre, and the staff are pretty good, so no problems doing it all on your own.
Journey from Taipei to Sun Moon lake by bus is about 4+ hours. There are also reular buses from Taichung, which explains its popularity as its so easily accessible. I took the GreenTransit bus from Taipei, which transit at Puli, a town known for its Shao Hsing wines. All in all, Sun Moon Lake can be easily incorporated into your self-planned itinerary, so have a go!