This paper analyzes the behaviour of a specific type of production system considering the decay of raw materials and in-process materials. The material which perishes with time will register a decrease in its stock level. The decrease in inventory level has considerable impact on inventory policy of a production system. Realising the importance of the effect of perishability of the products, an attempt has been made to investigate the effect of decaying materials on the Economic Production Quantity (EPQ) and Economic Order Quantity (EOQ). The product is manufactured in batches and the raw materials are obtained from outside suppliers. The proposed model integrates the inventory problem of raw materials and the finished product of a two stage production system manufacturing a single product. The production system considered allows the procurement of several batches of raw materials at the same time. The basic criterion to estimate the EPQ and EOQ is the minimization of total variable cost.