I am currently making a picture book, but it has pictures and I don't know where in the manuscript they should go.
In my experience, most publishers prefer to match the artist and the writer themselves, so they prefer the manuscript to not have pictures included. The only real exception is for people who do both well, and even then they are likely to have first established themselves as one or the other.
If you do decided to submit both, the manuscript should be presented as just text, like any other manuscript, and the pictures in a separate portfolio. (You can include some notations to indicate what goes together.) Occasionally people will also submit a mockup of the final product, but that isn't a requirement.
If you are more of an artist than a writer, you can just submit a portfolio of art and see if you can get picked up for a new illustration project.
I agree, publishers and agents don't expect to see the illustrations. The manuscript should only include the text. I believe that the easiest way to organize the manuscript is to indicate each page with the page number between parenthesis. Also indicate actions or expressions not specified in the text that need to be reflected in the illustrations between parenthesis.