John Swartzwelder wrote the episode and David Silverman served as director. Following the success of "Homer at the Bat", the writers wanted to try a similar guest star heavy episode, except with celebrities instead of baseball players. The episode proved quite difficult as many of the actors asked to guest star declined at the last minute and the comeback special portion was nearly scrapped. Johnny Carson, Hugh Hefner, Bette Midler, Luke Perry and the Red Hot Chili Peppers (Flea, Anthony Kiedis, Arik Marshall and Chad Smith) all guest star as themselves and appear on Krusty's special. Elizabeth Taylor and Barry White, both of whom guest starred in previous episodes this season, make cameo appearances.
Left without work, Krusty falls on hard times and begins suffering from depression. Meanwhile, Bart and Lisa, all along unimpressed with Gabbo, decide to try and help Krusty. After visiting his house and seeing photos of Krusty's celebrity friends, they suggest he host a comeback special. Bart and Lisa begin recruiting major celebrities to appear on Krusty's special: Bette Midler, Johnny Carson, the Red Hot Chili Peppers, Hugh Hefner, Luke Perry (Krusty's "worthless half-brother"). They also try to recruit Elizabeth Taylor but she declines the invitation.
Bart and Lisa return to Krusty to declare their success, only to find him morbidly obese from drinking several fatty milkshakes after believing them to be weight-losing shakes. Fortunately, the entire Simpson family helps get him back into shape before the special airs.
Krusty's comeback special features his reunion with Sideshow Mel, Luke Perry getting shot out of a cannon, the Red Hot Chili Peppers singing "Give It Away", Johnny Carson lifting a car over his head and Krusty and Bette Midler singing "Wind Beneath My Wings". The show is a great success and Krusty's career gets back on track.
The idea of The Krusty the Clown Show being cancelled was pitched by writer John Swartzwelder. The rest of the writers decided this would be an opportunity to include a group of celebrity guest stars. They had done a similar episode the year before called "Homer at the Bat" which starred nine Major League Baseball players and had hoped to emulate its success. At that point, the writers had a list of celebrities that had wanted to do a guest spot on the show and decided to use this episode to burn through some of them. However, the episode was described by executive producer Mike Reiss as "a nightmare" because several guests pulled out at the last minute and the script had to be changed several times. One of the goals for the episode was to have a living ex-President of the United States. They wrote "very respectful but cute" parts for every living ex-President at the time, but they all turned them down. Only Ronald Reagan responded, sending a politely worded reply.
All of the guest stars were recorded over a period of several months. One of the writers' goals was to get a musical act to appear, but several performers, including The Rolling Stones and Wynonna Judd, turned the role down. The Red Hot Chili Peppers finally accepted, and were directed by George Meyer who told them to ad-lib many of their lines. The celebrity aspect of the episode was almost canceled because the producers were unable to get an obligation before the record deadline. Johnny Carson appears in the episode, and it was one of the few televised appearances he made after he retired from The Tonight Show. He recorded his lines the night after the 44th Primetime Emmy Awards. The original role pitched for Carson was one where he visited the Simpson family's house and mooched off them. Carson turned down the role, so the writers went the opposite way and made him look extremely versatile with several different talents. Bette Midler's condition for guest starring was that the show promoted her anti-littering campaign. Elizabeth Taylor guest starred as herself and also recorded a part as Maggie Simpson in "Lisa's First Word" on the same day. Luke Perry was one of the first guest stars to agree to their part.
The character known as the Old Jewish Man makes his debut in the episode.
The short cartoon "Worker and Parasite" is a reference to Eastern European cartoons. To produce the animation, director David Silverman xeroxed several drawings and made the animation very jerky. The scene where Krusty sings "Send in the Clowns" was very tricky for the animators because it involves two shots of the same scene from different angles. Parts of the scene were animated by Brad Bird.
Folk singer Judy Collins' 1975 rendition of the song "Send in the Clowns" is parodied in the episode, and Krusty sings the altered lyrics: "Send in those soulful and doleful, schmaltz-by-the-bowlful clowns" in a musical number of his comeback special. Gabbo's name comes from the 1929 film The Great Gabbo. He was originally designed to be more square, but the second design was made to be "a demented Howdy Doody". His voice was based on Jerry Lewis. The sequence with Gabbo's song contains several references to the 1940 film Pinocchio. Krusty mentions that he beat Joey Bishop. Bishop was an entertainer who had his own show, The Joey Bishop Show, which ran opposite of The Tonight Show Starring Johnny Carson. Bette Midler's serenading Krusty is a reference to the way Bette sang to Johnny Carson on the penultimate episode of Carson's The Tonight Show. The scene in which Krusty instructs the Red Hot Chili Peppers to change the lyrics to the song "Give It Away" is a reference to Ed Sullivan instructing The Doors to change the lyrics to the song "Light My Fire". The poses of the Red Hot Chili Peppers in the scene are based on the movie The Doors. Several scenes in Krusty's special are based on Elvis Presley's '68 Comeback Special. The musical piece that Hugh Hefner plays on the wine glasses is from the Peter and the Wolf and is composed by Sergei Prokofiev.
In 2006, Bette Midler, Hugh Hefner, Johnny Carson, Luke Perry and the Red Hot Chili Peppers were listed at number four on IGN's list of the best Simpsons guest stars. In 2007, Vanity Fair named "Krusty Gets Kancelled" as the ninth best episode of The Simpsons. John Orvet felt, "This is Krusty's best episode—better than the reunion with his father, or the Bar Mitzvah episode, which won an Emmy much later on. The incorporation of guest stars as themselves is top-notch, and we get to see the really dark side of Krusty's flailing showbiz career. Hollywood, television, celebrities, and fans are all beautifully skewered here." Brien Murphy of the Abilene Reporter-News classed "Krusty Gets Kancelled" as one of his three favorite episodes of The Simpsons, along with "Behind the Laughter" and "The Simpsons Spin-Off Showcase". Though Jim Schembri of The Age put the episode among his top 10 episodes of the series, he also noted "Unfortunately, this signaled the beginning of the show's obsession with star cameos. An article in the Herald Sun placed "Krusty Gets Kancelled" among the top 20 episodes of The Simpsons, and characterized "The sight of Krusty's feeble attempt to fight back with his own gruesome ventriloquist doll, which falls apart on his lap on air" as the highlight of the episode. TV Guide named "Krusty Gets Kancelled" as the second greatest Simpsons episode and the 66th greatest TV episode.
In an article about the 2003 DVD release in The Independent, "Krusty Gets Kancelled" was highlighted along with episodes "When You Dish Upon a Star", "Lisa the Iconoclast", "Dog of Death", "Homer Badman", and "Grampa vs. Sexual Inadequacy". In a 2004 review of the release of The Simpsons season four on DVD, Andrew Pulver of The Guardian highlighted episodes "Kamp Krusty" and "Krusty Gets Kancelled" as part of "TV art at its peak". Mike Clark of USA Today also highlighted "Kamp Krusty" and "Krusty Gets Kancelled" as better episodes of the season, along with "A Streetcar Named Marge" and "Lisa the Beauty Queen". Jen Chaney of The Washington Post described episodes "A Streetcar Named Marge," "Mr. Plow," "Marge vs. the Monorail" and "Krusty Gets Kancelled" as "gems" of The Simpsons' fourth season. Spence Kettlewell of The Toronto Star described season 4 episodes "Krusty Gets Kancelled", "Kamp Krusty," "Mr. Plow," and "I Love Lisa" as "some of the best episodes" of the series. Forrest Hartman of the Reno Gazette-Journal wrote that the large number of celebrity appearances detracted from the episode, commenting: "The result is a boring hodgepodge of scenes with Bette Midler, Johnny Carson, the Red Hot Chili Peppers and more where we're supposed to laugh simply because famous people are interacting with Krusty." The episode is one of co-executive producer Tim Long's three favorites, including "The Itchy & Scratchy & Poochie Show" and "A Milhouse Divided".
In 2000, the episode was released as part of a Twentieth Century Fox boxed set The Simpsons Go Hollywood, commemorating The Simpsons' 10th anniversary. The set included "some of the series' best spoofs of movies and TV", and also included episodes "Marge vs. the Monorail," "A Streetcar Named Marge," "Who Shot Mr. Burns", Parts 1 and 2, and "Bart Gets Famous". The episode was included in a 2003 release of The Simpsons Classics on DVD by 20th Century Fox Home Entertainment.