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from a small, local, cache or forwards them to a real, recursive, DNS
server. It loads the contents of /etc/hosts so that local hostnames
which do not appear in the global DNS can be resolved and also answers
DNS queries for DHCP configured hosts."

I know that if you set the LAN domain name ".lan" in the OpenWRT webui
(this gets written to /etc/resolv.conf as a "search .lan" line) and
your devices are DHCP clients that send their own hostname (or have
static DHCP entries setup in the same webui - writing to
/etc/dnsmasq.conf ?), you automatically get resolution of name
"device.lan". This even effects reverse DNS, which can throw you off
if you've restricted access in config files to 10.* hostnames and
suddenly they're resolving as *.lan resulting in access denied! And of
course, for DNS lookups outside of .lan you get the same results you
usually get.
Configuring dnsmasq manually, you can even have different fake domains
for different ip ranges; see the -s/--domain option in the dnsmasq man
page.