SriRam-
AFC= Air Fuel Control. The aneroid on top of the injector pump. I believe Fritz's Ram Tech page has detailed diagrams. Basically, it is a smoke control device which is adjustable, given the VE is mechanically controlled. It holds back the fuel til there is air to burn it, hence the name.
The timing affects MPGs based on the fact that advanced timing will equal more power on a given amount of fuel, to a point. The reason timing is retarded from optimal is mainly due to emissions concerns (gotta love the Egotistical Pinhead Admin)- details of which I wont go into, since this is a fuel economy thread- but also to a point, to help longevity, since advanced timing increases internal cylinder pressures. But the Cummins is so over engineered in stock for that it wont become an issue til about 850K.
So, more power from "x" amount of fuel can also equal the same power on less fuel, or better MPGs. Simply put, it has to do with combustion, volumetric efficeincy, and the ever important timing. And, unlike a gasser, you dont have to worry about preignition in the same way you do in a gasser, since the fuel self ignites anyway. Does this clear stuff up a little? or did I just muddy the water?
But, gearing also comes into play, due to the BSFC (Brake Specific Fuel Consumption) curve. What that is, is a graph that displays the fuel needed per horsepower at a given RPM. Higher RPMs require more fuel, and more power requires more fuel. So, all else being equal, you should be able to go farther on a gallon of fuel while turning 1800RPM than you would at 2400RPM. Like timing, there is a peak of efficiency, where lower RPMs require more fuel. I think the peak efficiency in stock form is around 1750-1800 RPM. Different turbo configurations, head porting, etc, can affect eficiency at various RPMs, so that is something to consider. If you alter the air or fuel flow curve, you alter the BSFC.
Daniel