I use apoxie sculpt on dolls, and use tools such as a saw, utility knife or dremmel (otherwise known as a rotary tool) to make cuts when needed.
Air dry clay is good, but it can dry and leave cracks between itself and the plastic, or pop off. You can glue it back on though. Air dry clay also takes 2-3 days to harden and dry completely, opposed to the 1 day curing time of apoxie.
I also second having a look at dollightful, since she makes several dolls with modifications and sculpted parts. Maybe hextian and dollmotion as well, since they also do a fair bit of sculpting.