The code should look something like below (not tested):
frappe.ui.form.on("Production Order", {
setup: function(frm) {
var item_group = "";
if (frm.doc.item_type=="Type 1") {
item_group = "Group 1";
} else if (frm.doc.item_type=="Type 2") {
item_group = "Group 2";
}
frm.set_query("production_item", function () {
return {
query: "erpnext.controllers.queries.item_query",
filters: {
'is_stock_item': 1,
'item_group': item_group
}
}
});
}
})