I know this may be a dumb question, but as a home based business of one employee that makes custom orders to order, am I considered a retail business?

Also do I count inventory as a bakery business? I have lots of non bakery things stocked. Do I need to count things like how much gel coloring is left in the bottle or each dragee in the jar? Does the items I have stocked get counted as supplies instead?

What context are you looking at? If you sell directly to consumers instead of through intermediaries like wedding venues, coffee shops, etc. then you are a retail business (as opposed to wholesale).

Regarding inventory, if it's only for your own internal business processes it's really up to you how detailed you have to be. Even "non-bakery" items can be vital to your business, so you should at least have a general idea of how much you have remaining for things like food coloring and dragees so you know when to reorder.

Sounds like you're doing your taxes... am I right? lol

If you are doing your taxes and you have a home-based bakery you really don't have to worry about inventory too much, since you can use the cash method of accounting (which is basically income earned in 2010 - expenses paid in 2010) as long as you gross less than $1 million/year.

http://www.irs.gov/publications/p538/ar02.html#d0e1793

Yep, use the cash method and then you don't have to keep that detailed inventory. And yes, you'd be retail if you're selling at full price to consumers.