That is based on the engine being fully loaded so producing maximum power at the chosen revs. It is a simple calculation from the power curves using the power output and specific fuel consumption for the revs. With a boat this only occurs at close to maximum revs if the prop is correct. So it tends to overstate at revs lower than the maximum because the prop will not need full power at lower revs, at least in flat water as you say. Given that boating is usually in mixed conditions it does give a good guide, although if you have long periods of motoring in flat conditions average consumption will be less than indicated.
