I believe that the musical isn't canon and is just a made up story told by Shawn and Gus, because that's what Z said. If the hanging scene never actually happened then Yang's death didn't happen either. However, her remains are still seen at the end, which leads me to believe that she could've died while locked up in prison and Shawn heard about it when he got to that place where Z was institutionalized. He probably saw her body there and decided to cremate her and pour her ashes into a jar. Like I don't want to believe any of this is true as the Yin/Yang situatio ended at the end of Season 5.
Review of Psych: The Musical
