Fuel Mileage Caluculation

It uses the MAF sensor and the VSS (vehicle speed) and it is very accurate as long as you know the desired A/F ratio. The car's ECU has a target for Air/Fuel (A/F) Ratio (usually, a little less that 14.7:1 Air to Fuel by mass). Based on how much air is coming in, the calculation is relatively simple.

Read the MAF which gives grams of air/second Divide that by the A/F ratio which gives grams of fuel/second multiply that by 3600 gives grams of fuel/hour divide that by 786 (the mass of a litre of fuel in grams) which gives litres/hour then take the vehicle speed (from the VSS) and divide that by the litres/hour which gives litres/km multiply that by 100 which gives litres/100km.

The ECU has to calculate grams of fuel anyway based on the MAF and corrections applied based on the O2 sensors to tell the ECU whether it got it right or not, so it is pretty accurate.

This would provide the instantaneous fuel consumption reading that is constantly varying, unless one is driving at a constant speed on a level road. To get the average fuel consumption, one must conduct some sort of an integration of all the instantaneous calculations to derive the fuel consumed over the same period of time the trip odometer is accumulating km travelled.

That's right. It is probably just an averaging function of some set amount of time or distance.