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The Sales Order Qty refers to the quantities as listed on the sales order. The Allocated Qty refers to the quantity of items that have been arrived were entered at the time of arriving the purchase order into the warehouse from a purchase order. Next you need to decide what will happen if you have an order that isn't fully packed. The 'Set Orders to FULLY PACKED regardless of un-shipped Qty' will cause the order to appear as filled and the customer will never receive the items, or you can select 'set un-shipped items to BACK ORDER' to create a back order for the items and have the customer receive the items at a later date.
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