Two unemployed brothers, Bob and Doug McKenzie (Rick Moranis and Dave Thomas), place a live mouse in a beer bottle in an attempt to blackmail the local beer store into giving them free Elsinore beer, but are told to take up the matter at the Elsinore brewery instead. After presenting the mouse to management at the brewery, the brothers are given jobs on the bottling line inspecting the bottles for mice.
Meanwhile, the evil Brewmeister Smith (Max von Sydow) is perfecting a secret plan to take over the world by placing a mind-control drug in Elsinore beer which, while rendering the consumer docile, also makes him or her attack others when stimulated by certain musical tones. Smith tests this adulterated beer on patients of the neighboring Royal Canadian Institute for the Mentally Insane, which is connected to the brewery by underground tunnels.
They learn the former brewery owner John Elsinore has recently died under mysterious circumstances and his daughter, Pam (Lynne Griffin) has been given full control of the Elsinore brewery. While exploring the massive brewery, they find a shuttered cafeteria containing an old Galactic Border Patrol video game which supernaturally reveals that Brewmeister Smith murdered John Elsinore and that Pam’s bumbling Uncle Claude (Paul Dooley) was deeply involved. Additionally, while poking around the brewery, Bob recognizes one-time hockey great, Jean “Rosie” LeRose (Angus MacInnes), who suffered a career-ending nervous breakdown and has fallen under Smith’s control.
Eventually, Bob and Doug wander into Brewmeister’s operations room while he is away, and Doug takes a floppy disk containing video of John Elsinore’s murder (thinking it is a “New Wave EP” and not realizing the importance of its contents). Smith and Claude tranquilize the brothers and arrange to frame them for murder, concealing Pam and her father’s friend, Henry Green in beer kegs in the back of their sabotaged van. The brothers are unable to stop and crash the van into Lake Ontario, but all survive, Pam with apparent memory loss, and the brothers are arrested.
When put to trial, Bob and Doug’s antics cause the judge to declare them insane, and he puts them under Brewmeister Smith’s care at the asylum. Rosie soon finds them and helps them escape, and they later find Pam and rescue her as well. Rosie, having figured out Brewmeister’s plan, foments an uprising among the brainwashed test subjects. The brothers separate for the first time in their lives, with Doug helping Rosie to overpower Brewmeister Smith. However, Smith has locked Pam and Bob into a brewery tank, filling it with beer; they escape this possible death when Bob consumes all the beer (growing to a cartoonish size).
John Elsinore’s ghost warns them that Smith has already shipped tainted beer to Oktoberfest and tells her to stop them. The police accompany the brothers back to their house to retrieve their beer-drinking dog, Hosehead, who resembles a large skunk, to invade the party. Enticed by free beer and sausages, Hosehead leaps into the air and literally flies over the city, crashing into the tent at the celebration and frightening people away from the tainted beer. In the end, the McKenzie Brothers save the day and Pam and Rosie find true love. As for the contaminated beer, Bob and Doug are allowed to haul away the lot to apparently try to drink it all.