Applied to a moment of extreme ditziness, generally without realising how stupid you sound/act.
4 people are ordering a pizza.
A: "Do you fancy a Margerita pizza? But with extra cheese?"
B, becoming confused between a Margerita Pizza and a Margerita cocktail, replies, "There's no cheese in a Margerita! Only lime and salt..."
Then the realisation that they are idiots dawns.