The Stinky Cheese Man and Other Fairly Stupid Tales by Jon Scieszka and Lane Smith
Very funny book. I can't take credit for the song. It was written by a bunch of music teachers at a teacher workshop.
Choose children to pick out instruments to represent the main characters - whatever instrument they choose that they think will sound like that character. The Stinky Cheese man, the old man, the old woman, the cow, the children, the wolf, the olive, and so on. As you read the story, they must listen and play their instrument when their character is named. Sing the song every time the Stinky Cheese man sings it.