I cut the bottom border of the pillowcase off (the part that's open for sliding the pillow in). The top part of the pillowcase needs to be cut open, if you have an extra long pillowcase like I do you may want to take more length off, which you can do either from the top or the bottom.
Take the border of the pillowcase that you cut off in step one and cut it in half length wise. I used these pieces to make the straps. Fold right sides together and sew down the outside edge. Turn right side out, fold up the edges and sew into place. I didn't take any measurement for this step because it all depends on your little tykes measurements.
Measure around your little one's chest where you want the top of the pj dress to sit and add 1'' to your measurement. Cut your elastic this length. Snap a safety pin to one end of your elastic and thread through the pocket you created by turning down 1'' and sewing. (Excuse the crazy mess of threads, I did cut that off before finishing). When you've threaded your elastic all the way through, sew the ends together with a zigzag stitch to make it strong then sew the opening closed.