Whoops - forgot to answer your second question. My favorite way of making circles is to use heat-resistant template plastic. Cut a piece exactly the size you want the finished circle to be. Cut the fabric circle 1/4" larger than the template. Sew basting stitches in the seam allowance of the circle, near the edge, making sure you have long thread tails on both sides of the fabric and also both starting and stopping points. Put the template plastic in the center of the wrong side of the fabric, and draw up the thread on one side of the fabric. This will gather the fabric around the template. Holding the thread taut so it doesn't ungather, paint a little water or starch on the edges and use your iron to dry it. Then you can remove the basting stitches and sew your applique on.
HTH!