Steam-a-seam or wonder under will help keep the fabric edges of the applique from fraying. To keep the "cupcakes" soft (or the quilt from being stiff!) try cutting the center of the steam-a-seam away before attaching it to the cupcake fabric, leaving just a 1/4 inch inside the lines of the applique.
Is that clear or confusing? I hope it at least kind of makes some sense. After all a little girl wants to be able to cuddle with her quilt made by mom!