Crush cereal. (To easily crush cereal, place in plastic bag or between sheets of waxed paper, and crush with rolling pin.) In large bowl, beat butter and cream cheese on medium speed until smooth. Beat in granulated sugar until fluffy. Beat in vanilla and egg. Stir in flour, crushed cereal and baking powder. Divide dough into thirds. Wrap each in plastic wrap. Refrigerate 2 hours.
Heat oven to 375°F. Roll out dough, 1/3 at a time, on well floured surface to 1/8-inch thickness. Cut into rounds using 3-inch cookie cutter. On ungreased cookie sheet, place 2 inches apart.
Bake 8 to 10 minutes or until bottoms are light golden brown. Cool 1 minute; remove from cookie sheet to cooling rack. Cool completely.
In medium bowl, beat powdered sugar and milk until smooth. Spread over cookies. Let stand until dry. Decorate with decorating gel. Let stand until dry. Store in single layer in airtight container.