What is the best compressed iTunes format?

With an ALAC file...(Apple Lossless), you can reconstruct a bit-accurate copy of the original file.
Than the conversation turns to the speed / accuracy of the reconstructing computer.

The quoted bitrate (above) would seem pretty spot on. Very complex music will run 1000+ while music of low complexity dips below 600, but rarely.
Check out a copy of a CD in ITunes to get the idea. Part of the listing for a sony recorded in ALAC is its bitrate.

Unless you use the IPod as a hi-end source, MP3-320 is probably the highest you need to go......
In I-tunes, go to 'preferences', 'General', 'Import Settings' and set to your preference.
I, for example, use ALAC then have 2 playlists. One is the lossless files I send to stereo and a COPY of that in MP3-160 goes on the 'pod...for auto duties.

You can COPY any lossless files in your music folder as another, lower resolution format. Set the import settings back to whatever for lower res....It'll leave the ALAC stuff alone, but you'll have 2 copies in your music folder...1 of each.

Doesn't ALAC cut file size by about 30%->35%? Cutting by half while 'suffering' the loss of quality of even the best bet in MP3 using VBR and 320KbS base rate?
I'm not sure the marginal saving of disk space is worthwhile....at least not for me.
I'm well served by double copies, and ALAC for the house and MP3-160 for the car / pod.

Storage these days is CHEAP. Having a PAIR of backups may not be a bad idea and a terrabyte is a massive amount of music. I don't know current state-of-art, but RAID systems....RAID5, for example, are reasonably safe and redundant though at a COST! $$$$ I would only backup ALAC or other bit accurate copies, NOT any MP-3 which can be easily redone.

The OTHER advantage of MP3-160 is that most (all since say.....'06 or so) car CD players handle this format just fine, thank you, so you can leave the 'pod in out of the loop when driving.

ALAC is indeed 'lossless' in the sense that you can re-create a bit-accurate copy of the original file.....from the ALAC file.
The very definition of lossless:

Real,
My personal theory is that the bitrate is indeed variable but based on music complexity. This is pretty obvious by the bitrate speeds listed...if you enable that function in I-Tunes.

I just copied 'The Man With The Horn', a Miles Davis album. Indeed, the copy speed varied from 6x to over 10x. When I looked at the files, the copy speed pretty much agreed with the bitrate.

More complex music would demand a higher bitrate. As a test, I'd record a few simple test tones. If the bitrate is very low, that'd nail it.

My analogy would be my photography. JPG is a compressed format with many different levels available to users of Photoshop and other programs. Camera Raw, is basically a digital negative and is 4x or 5x larger than even a large JPeg. So, Camera Raw is an uncompressed format, while JPG is equal to an MP-3 / 320.
There's more to it than that, like screen resolution and bit depth, but you get the general idea.

I'd say bitrate is not arbitrary on ALAC files. Rather a measure of 'complexity'. If what you mean by arbitrary is that you have no control over it, that's also true. But not in the sense that somebody just picked a number. ALAC would seem to end up about 30% to 35% reduced from the original.
Very complex, rapidly changing or 'dense' music will get a higher bitrate than sine waves. Maybe I'll test this, later today. I think you may be on to something with file size/length math. I'll look over some of the large number of songs I've got in ALAC and look for a pattern.

The idea behind lossy files...and this applies to photography, too, is to only discard the least significant data. That which couldn't be heard (seen?) anyway.
Of course, this doesn't work well, at least at higher compressions. In Photoshop, I have a choice of 10 or more 'levels' of compression. Using extreme enlarements of small parts of a picture, you can clearly see what changes. The changes are most readily apparent in more.....complex parts of an image. Big enlargements are hurt worse than small prints. Images for monitor use are nearly immune!

Yes, processer overhead makes sense. Again, using photoshop as an example, when I make a big change to a photo, It can take several seconds to process.

I just decided early on, after experimenting with FLAC, to change over to ALAC. It was more.....painless, for me. And I Tunes makes it easy to 'downconvert' to a much smaller but still listenable MP3-160 bitrate. Album art is more easily manged, at least for me. That, and the fact I can stream music wirelessly to my stereo is the icing on the cake. I only wish the Airport Express were better clocked.