Are they making all the folders as subdomain in that method?
I want to have only one folder to be a subdomain.

Is it possible to have subdomain1.subdomain2.domain.com?

well the domain will only match in the first place if you match it on the serveralias amongst other thigns, so you can control what subdomains are possible. sure, you can do that if you want to code it.

Lets fix the problem with apache. It will give me some knowledge on virtualhost configuration.
Are those virtualhost settings right?

well you've no directory declaration in there, so I'd guess it's unable to access the contents, but you need to look in the logs after a restart to see anything potentially interesting

Which log file should i check?
After adding directory declaration, it is still not working