This method will produce a pure rotation matrix and thus overwrite the transformation which was previously set via makeScale().
I suggest you change your code a bit and compute your transformation matrix with a single call of Matrix4.compose(). I have not tested this code but I think it should be:
var xPos = -110;
var scale = new THREE.Vector3();
var position = new THREE.Vector3();
var rotation = new THREE.Quaternion();
for ( var count = 0; count < codedInstancedMeshGroup.count; count ++ ) {
// scale
var randomScale = (Math.random() * (2.0 - 1.0) + 0.1).toFixed(2);
scale.set( randomScale, randomScale, randomScale );
//rotation
var tempRotationAngleForMatrix = Math.floor(Math.random()*359+1);
rx = Math.random().toFixed(2);
ry = Math.random().toFixed(2);
rz = Math.random().toFixed(2);
var tempVector3AxisForMatrix = new THREE.Vector3(rx, ry, rz).normalize();
rotation.setFromAxisAngle(tempVector3AxisForMatrix, tempRotationAngleForMatrix)
// position
xPos = xPos + 50;
position.set( xPos, 20, 0 );
codedInstancesMatrix.compose( position, rotation, scale );
// update
codedInstancedMeshGroup.setMatrixAt( count , codedInstancesMatrix );
}