What does it mean to describe someone as a butt steak?

The key word is "butt". It's like calling someone an ass, but in a way that has a double meaning so as not to get in trouble from your superiors for using foul language. A butt steak is another term for top sirloin, so that's the double meaning. It was clearly meant as a veiled insult.

Some hearsay for you... I had a friend that was in the military (in the 60's) and he told me that superiors were not allowed to insult lower ranking troops so they would use "creative" names and acronyms that technically had a non-insulting meaning but everyone knew it was just a veiled insult.

For instance, they would call people a TURD which is another word for poop, but they said it was actually an acronym that meant "Trainee Under Rigid Discipline". Now that's not an insult - it's just a descriptive classification.

Police, prison guards, and the military share some culture. This could be seen as another way of calling the prisoner an ass (bad word for butt), but not really.

Most likely he was trying to subtly let him know that he was going to be treated like a piece of meat. Andy was supposed to be a fairly good looking man, and in male prisons, "pretty boys" were highly prized. Steak was considered highly sought after back then, so it's implied that he will be very desirable in the prison.

There is nothing much deep here, it's just a plain insult.

Generally, Steak is :

meat generally sliced across the muscle fibers, potentially including a bone. wikipedia

So butt-steak means sliced meat from a butt and is used just to insult.