Some extra thoughts to tack onto Bob's comments.
if you go up 500 feet the adiabatic lapse rate will reduce the temperature by 1 Deg C, which is because the air is less dense as you go up... less dense equals less heat over the same volume, so it's cooler.
Not quite.
The basis for the lapse rate is, as Bob indicated, necessarily tied up with vertical motion of a parcel of air. The atmospheric pressure reduces with height (as the pressure is related to the amount of stuff above the location and, the higher we go, the less the amount of stuff there is above us to make the pressure). As our little parcel of air goes up, it encounters reduced pressure, so it can expand to fill the hole, as it were. However, to expand it has to do some work. To do some work, it needs some grunt power.
Now the grunt can come from external sources (eg what happens to water heating on the stove due to the gas burner or electric hotplate) ... but, in the atmosphere with a parcel of air moving, there's really nothing there which can heat/cool the parcel of air.
So, if we can't get any grunt from our surroundings, we are left with having to pull some energy from the parcel of air itself. When we pull this energy out to run the expansion, the internal result is a drop in the temperature of the parcel of air. Same thing happens when you purse your lips and blow. The air inside your mouth increases in pressure a little bit (and heats up a little bit - but that cools back down by conduction to the buccal environment). As the air moves through the embouchure (I admit to being a woodwind player in years gone by) the pressure decreases and, there being no source of energy to run the expansion, the expansion pulls the energy needed from the air itself and the temperature drops, quite noticeably.
The term "adiabatic" comes from thermodynamics (ie physics) and simply means a process which occurs without any energy or mass transfer to or from the surrounding environment.
if the ISA says standard is 15 Deg C at MSL and your non-standard temp is 16 Dec C, you compensate by 120 feet (higher) because warmer air is less dense.
First consideration is that the number is not a constant and, if you look at the history, 120 ft/deg is, itself, an approximation to 118-ish ft/deg, which is, itself, an approximation to what the real variation is.
As the explanation was given in a previous thread, I'll link to that rather than repeat the story.
bobtait.com.au/forum/performance/6777-altimetry-rates#13257
They're both measuring
... different things. You need to be comparing apples with apples to do your sort of sums, I fear.