How to write a good software documentation

I am wondering how software documentation fits in a real production process. For example, I know that it is a good practice that a code is covered with unit tests. The code is written, then sent to a testing department. Tester sees the design document and writes tests depending on this design document. Now there are questions concerning a program written in C:

• what should the design document contain? what it should not contain?
• at which point of the development should I write a documentation?
• how to make it useful so other people can really use it, for writing unit tests for example?
• Do I need to create a `separate design document for a "feature" or for every, for example, C function?