Heat oven to 350 degrees. Have baking sheets ready.
To make cookie: beat butter, powdered sugar, and vanilla in a large bowl with electric mixer until smooth. On low speed, gradually beat in flour. Chill 30 minutes or until firm.
To make filling: mix candy and 1/4 cup of the powdered sugar. Mix cream cheese and milk until smooth. Stir in remaining 1/2 cup powdered sugar, 3 tablespoons of candy mixture, and 1 drops food coloring.
Roll dough into 1-inch balls. Place 2 inches apart on baking sheets. Make deep hole in the center of each ball using fingertip or handle of a wooden spoon. Fill each hole with 1/4 teaspoon of the filling. (I find the easiest way to do this is with a pastry bag) Bake 12 to 14 minutes until set, but not brown (do not let filling bubble over top of cookies). Roll in remaining candy mixture while still hot. Cool on wire racks.