Sludge is thick, flexible, almost like oily firm mud.
Varnish is, as the name implies, thin, brown, hard.
Carbon is baked-on hard black stuff.
That engine looks good for the mileage. The Auto-Rx will clean the ring grooves, as said above, as well as cleaning away any sludge, carbon, and most of the varnish. Don't expect it to clean the color out of the pores in aluminum castings, and that doesn't matter anyway. Do follow the directions exactly. I've liked the results on the Auto-Rx cleanings of high mileage engines I've done. A-Rx reduced the oil consumption in my turbo Volvo to 25% of what it had been, as well as making the engine smoother and peppier.