This movie was supposed to just be about KISS
The Scooby Doo gang was added in at the last second because some higher up didn't think anyone would watch an animated movie about KISS fighting an evil space witch. That would explain the bizarre plot and lack of an actual mystery. The cosmic elements really were just a hallucination.
That last churro Shaggy pulled out of his pocket had gotten saturated with the Crimson Witch's hallucinogens when the gang got overcome by her vapors the first time. He and Scooby inhaled the residue when they took an anticipatory whiff of the churro, and succumbed to one last bout of hallucinations, seeing KISS reappear in their "superhero" modes and toss the diamond back and forth in the sky.