There's a toy made by Hasbro called the Easy-Bake Oven that's been in production since the early 1960s. It has a heating element (originally a 100 watt light bulb) that lets kids bake "cakes" using packets of mix. Despite it having a very good safety record (percentage-wise, given how many millions of them have been sold) the urban legend persists that it's dangerous.
No idea - it's just one of those things that arise out of nothing. Someone thinks "OMG someone could cook a pet hamster in it!" and it just goes from there, like a game of Chinese Whispers.