Use a heavy-bottomed large pan. Melt the butter over low heat. Add the marshmallows and continue over low heat to melt the marshmallows. Stir frequently to help them melt. When the marshmallows are completely melted, remove pan from heat. Stir in peanut butter and vanilla extract. Add the cereal a few cups at a time. Add until the desired chewiness is achieved. I add about 10 cups because I like mine chewy, not crispy.
Pour cereal mixture immediately out onto a buttered jellyroll sheet. Pat down with buttered hands so the top is level and the cereal has been squished into the corners.
In a microwave-safe bowl, pour in the butterscotch chips, followed by the chocolate chips. Microwave on HIGH for 1 minute. Let sit for 1-2 minutes, then stir. If not completely melted, stick in microwave for another 30 seconds, let sit another 1-2 minutes, and stir again. The butterscotch chips do not melt down as easy as the chocolate chips, that is why I put them on the bottom and let sit before stirring. When chips are melted, stir in the peanut butter. Pour over bars and spread frosting out to cover. Sprinkle with toasted coconut if desired... Cool to room temp and serve.