Choose children to be Mary, Joseph, shepherds, angels and wise men. You can have as many angels as desired but you will need one specific angel to bring the good news to the shepherds. The innkeeper is an optional character, as are children dressed up as sheep, a cow and a donkey.
A doll wrapped in a blanket will work fine as the infant Jesus. Any box or cradle covered with material will work for a manger.With the age of the children you are working with, shepherd's staffs are probably not the best props to include. The three wise men will need containers for gold, frankincense and myrrh. Create these by covering boxes with foil and gluing plastic jewels on them. If you choose not to have children dress up as sheep or other animals, you can create the animals by painting thick cardboard cut-outs to look like sheep, a cow or a donkey and stand them up on the floor.
The stage can be as simple or as elaborate as you desire. Construct a wooden stable frame from scrap lumber or a large cardboard box. Or simply have Mary and Joseph in the center of the stage, kneeling by the manger. If you choose to have an innkeeper scene, you can use a door that is already part of the stage or the children can mime knocking on a door and the innkeeper can "open" it.
An angel choir is an optional part of the play but it helps to set the ambiance. Teach the children in the choir three or four short Christmas carols and ask a parent or teacher to play piano or guitar for accompaniment. Good song choices are "Away in a Manger," "O Little Town of Bethlehem," "Silent Night" and "Angels We Have Heard on High." The choir can finish by singing "We Wish You a Merry Christmas." Only have the children sing one verse of each song.
Bathrobes and bed sheets can be easily turned into costumes for Mary, Joseph and the shepherds. More creativity can be exercised with the three kings, whose costumes can be exotic and elaborate. Thrift stores and garage sales are good resources for costumes. If you decide to have children dress as animals in your play, you may have to recruit a few parents with sewing skills to help with these costumes or purchase them ready-made.
It's best to have an adult as the narrator, since the flow of the play depends on how the story is read. You can choose to read the Bible version of the story from Luke 2 or you can write your own retelling so that it's easier for the children to understand. The most important factors are to keep it short and simple.