I have seen them done both ways, so it will just depend on what you like and how much time you have to change thread. You could put on black thread and do all the shoes, switch to purple and do all of that, then switch to pink, etc......rather than doing a block at a time with so many thread changes. I think this will make an adorable baby quilt. Are SBS's coming back, along with those adorable old fashioned baby girl names? I am not sure what you are calling a buttonhole stitch but I would use a blanket stitch to do the applique.....perhaps we mean the same thing?