The process is actually fairly straight forward in the panel.
Go to Domains -> Manage Domains, click on the small [DNS] next to the relevant domain and in the section titled Add a DNS record to example.com add the following information;
Name: Name of the subdomain you want to create the record for.
Type: Leave it on A
Value: Enter the IP address here.
Now just click on the Add Record Now! button and after everything propagates, your subdomain should work.
Oh yeah, in answer to your other question; It is probably a good idea to delete the existing DreamHost hosted sub-domain before creating the DNS record. It might also be a good idea to wait a while for the sub-domain to be entirely removed from the system before attempting to add the record.
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