[ajsnigrutin]

> - how did they figure out the theoretical best time in the first place?

Depends on the game...

With mario, if you know the max acceleration and speed of mario, and the length of the level, you can calculate the theoretical minimum needed to come to the other end, especially if no glitches are allowed. If you have to backtrack a bit, you can calculate the optimal path to pass through. Glitches (eg. passing through walls) make this harder.

With games like Zelda, breath of the wild, it's pretty much impossible to calculate exactly, except for taking the current records, finding flaws, errors and/or adding new optimizations, and subtracting the "lost time" from the record.... until a new, better strategy comes out.