Do you mean you purchase part 001 and then send it to another vendor who does something to it and you bring it back in as 002. Is that correct?

Yes, Louie . We are buying extrusion parts as 001 and send them out for powder coating and it comes back as 002.  

I would use Work Order and build 002 using 001 as the component and assign the purchase order for the powder coating to the work order.  Talk with your reseller and test in test company.

hmmm, I wonder what Kevin would suggest

There are a number of different approaches possible.

Receive 001.  Receive 002.  BM production to turn 001 + 002 into 003 (using a valuation which has cost tiers so the component values flow into the finished good).  Sell 003.

Thank you, Kevin : So, it is kind of a sub assembly and you are asking to introduce a new sub assy part number - Guess this works 

So, PO is treated as WO - In this case, how accounting can handle this ?

There is a DSD enhancement that allows you to have an item as a component of itself, if you have issues with bar codes (meaning the received 002 needs to be "002" at receipt and when shipped).

Transfer 001 into an "offsite processing" warehouse if you want to keep track of those quantities.

Kevin, I believe he means that 001 comes in, goes out for powder coating and comes back as 002

The PO would be for the powder coating.  The work order would combine 001 and the PO for the powder coating and produce the 002 with the cost of both rolled into 002

Yes, but the transactions I talk about deal with the values flowing into the final inventory (COGS on the invoice).  Part cost received into inventory as "001" and part cost received as "002"... consolidated during the BM production into the finished good before sale.

As I said, there are other approaches (including your suggestion using WO).  I expect Job Cost could be used too.