Not entirely sure what happened there. She hugged the monster and it turned into the boy, that faded away and she went to get the real boy. The monster was real, right? Not just some imagination by the boy, or how else can it be that the father is gone and likely with Sean.
shareThey talk about that in her support group, that everything in your dreams is just you, when you talk to someone, you are really just talking to yourself. I guess she realized, that the monster is the boy (or a part of the boy from his subconscious), there is no "real" monster. The boy has some insane mutant powers, he killed all those people in his sleep. At the end, the mom thinks he can maybe bring them back, but that is left open.
shareBecause we are dealing with a supernatural subject, there is no real answer that fits into a rational scenario. The Canker (Cancer) man is actually a depiction of the boys (Cody's) mother and her final words to her son before she died. Because he was not old enough to understand at the time, The Canker man was born in the boys mind. Because of his supernatural abilities to bring his dreams to life, the Canker man became the figure that "ate" people and they were never seen again.
What we saw at the end of the movie was the people taken by the Canker Man were actually held captive in cocoon like structures but were apparently still alive but in a state of suspension from actual harm. Cody mentioned earlier how a caterpillar in a chrysalis was kept safe until it turned into a mature butterfly.
What we saw at the end of the movie was the people who were in suspension were released and alive once the Canker Man was revealed as Cody's mother.
It is unclear to me as to what happened to Cody's adoptive father. The indication was that he may have died and was reunited with Sean, his son, in a hereafter. If that is the case, it is unclear to me as to why he died.
This is all theory on my part but this is how I interpreted it. Again this is all supernatural fiction.