The phrase implies the decision will result in something bad or regrettable. Go ahead and eat that spoiled food, but it's your funeral.
Pro Tip 2/3
Informal Warning
It's a casual and somewhat sarcastic way to caution someone without directly advising against it. You want to skip the company meeting? It's your funeral, man.
Pro Tip 3/3
Personal Responsibility
Using this phrase means the person must deal with the consequences of their choice alone. If you choose to quit your job like this, it's your funeral.