Thank you for sharing these details and I apologize for the delay in getting back on this.
Your understanding is correct and Toolset Forms don't have a built-in feature that can be used to populate related options on the fly, based on the user's field selection. Deploying something like this is possible, but, will require a fair amount of customization.
Here is an example of the process of adding a new object to a department:
1. User will see a form to enter a new object post. Through this form, you can collect basic information about the object like title, type, etc. At this point, you'll not collect information about its level or department.
2. After creating the object post, the user will be redirected to the created object post's single page, where there will be an edit form to edit that same created post.
In this form, you'll include a generic select type field to select the "Level". It will have the levels posts, related to the current user's organization. You can use a custom shortcode to generate these options, programmatically. For this, you can either use a view's output in PHP code or simply a "get_posts" query:
https://developer.wordpress.org/reference/functions/get_posts/
Here is an example support forum reply, where a similar setup was used to populate generic field options, programmatically:
https://toolset.com/forums/topic/split-publishing-related-many-to-many-posts/#post-1215323
3. Next, you'll need another generic select type field to select the "Department". It will have the department posts, related to the level selected by the user in the first field and its options can also be populated programmatically, like the first field.
4. The challenge would be that the "Department" field's options need to be dependent on the selection made in the "Levels" field. When the page will load, you'll know where to get the "Levels" from, but not the "Departments", because that selection is yet to be made.
To overcome this, you have these two options:
a). AJAX:
In the AJAX approach, you'll write custom JS and PHP functions to detect changes in the "Levels" field and populate the options of the "Departments" field every time the level selection is changed.
Here are some guides on using AJAX in WordPress:
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b). Non-AJAX:
In this approach, instead of using a single edit post form for selecting the levels and departments, you'll use two separate edit forms, one for each.
The first form will include the generic field "Levels" and the second one will include the generic field "Departments". On the form submission of each of these forms, you'll make sure that the page refreshes to stay on the same single object post page. This way, you'll be able to show the correct related "Departments" options based on the selected "Level".
5. Whether you adopt the AJAX or the non-AJAX approach, the last step would be to process the "department" selected in the generic field and connect it with the current object post, when the form is submitted, using the "cred_save_data" hook:
https://toolset.com/documentation/programmer-reference/cred-api/#cred_save_data
You'll also find an example function for this in the forum reply, I mentioned earlier.
I hope this makes sense and please let me know if any step or point is not clear.