I have been making these felted wool knit hats for a local boutique. Here is Maisie modelling one of them for me.
I purchased the knit at a great price and felted (or fulled) it in the washer/dryer.
The applique is in a wool felt and they are lined in polartec. The ears, braids and tassels are in a doubly fulled batch of the knit. Less stretch to it, but less chance of it pulling apart.