There are lots of links on building an outhouse. I was thinking on building one on my farm. I'd use the whole drum myself that way you only need to have it pumped much less often if at all. You didn't say how much use it would get.
One of the things I found interesting on one site was the vent pipe. He stated to use black plastic pipe and put it on the South side. This way the heat from the sun creates a natural draft so it doesn't smell inside.
The only problem I see with a straight hole is the sides slowly caving in over time. You could use sinder block, barrels etc.. just something for support. You also want to build up the area under the outhouse for drainage. This prevents rain water from filling up your hole.
Speaking of water, if you have water in your outhouse you'll probably want some kind of a drain field. This could be holes in the barrel but some perf pipe would be better. Of course then you want some kind of a baffle to keep floaters from blocking the hole/pipe. Either that or a seperate barrel just for water.
As for the frame 2x4's would be fine and you can side it with anything. Pressboard siding is cheap but youd need to paint it, you can use 1x or 2x boards, tin etc.. For the base I'd go treated timbers with a place to stick pallet forks if you need/want to move it. Fiberglass for the roof would let in plenty of light.
