Why doesnt my iPod show album art?
Storing the art in file id3 tags is the only method. Yes, doing it via iTunes is tedious,  it can be automated though.
Mass taggers exist on OSX, software such as beets or bliss. However they download cover art from online websites (google images, discogs...).
If you're interested only in copying your folder image to mp3 tags, I'm not aware of an existing tool that do that in batch mode. But a python script could be written for that purpose quite easily using mutagen library.