Diff balls have melted into plastic
 

I have a Schumacher KF2 SE, I rebuilt the diff about 4 month or so ago, gone to do it again and the balls have melted into the plastic. Does that mean I did them too tight or too loose last time I built the diff?

Or have they just worn down enough for the metal washers to rub against the plastic?

I suspect you've run it too loose, leading to slippage & heat build up. I'd recommend watching some ball diff building and running in guides on YouTube if you're going to have another go at building one.