Calorie Goals

MFP is set up so that you can lose weight without exercise. Not everyone can exercise, after all. So, you already have the deficit needed to lose weight at the rate you specified in your goals (.5 to 2 pounds per week) built into your goal of 1200 calories for each day. When you exercise, you earn calories to eat because eating them maintains that same deficit needed to meet your goal.

If you have a lot of weight to lose, you may find that you don't need to eat the extra calories because you'd have more calories available to eat anyway. Those of us with only a few pounds to lose, or close to 1200 calories per day, seem to find that we need to eat at least some of them back because exercise makes us more hungry.

One thing to keep in mind is that your goal loss for each week needs to be reasonable and I'm suspecting yours might not be unless you don't have much weight to lose. The fact that MFP has given you 1200 calories (the lowest it will go for a female) is usually a good indicator that one is trying to lose too much too quickly. Here's a good set of guidelines for how many pounds you should be attempting to lose each week. The number in parentheses is how many fewer calories you should eat than your body burns each day to reach that goal:

Pound per week goals
75+ lbs: set to lose 2 lb range (-1000 calories per day)
Between 40 - 75 lbs: set to lose 1.5 lb range (-750 calories per day)
Between 25 - 40 lbs: set to lose 1 lb range (-500 calories per day)
Between 15 - 25 lbs: set to lose 1 -.50 lb range (-500 to -250 calories per day)
Less than 15 lbs: set to lose 0.5 lbs range (-250 calories per day)

As you can see, if you only have 15-20 pounds to lose, 2 pounds per week isn't feasible because you need to be eating 1000 calories per day fewer than your body burns. If you don't have a lot to lose it's nearly impossible, to meet the 1000 calorie deficit unless you are spending hours at the gym. The point is, even if you set MFP for 2 pounds per week, if you aren't reaching that 1000 calorie deficit daily you aren't actually going to lose that much because you aren't creating the necessary calorie deficit. You'd be setting yourself up for disappointment and possibly failure.

Since you don't want to under-eat so much that you lose excessive amounts of lean muscle mass along with the fat, make sure that you're losing at a healthy rate.

Eat 1200 plus exercise calories. If you burn 600 during exercise you can eat 1800 for that day. If you're not losing weight as expected, cut back a few hundred of your exercise calories. I always ate the extra calories and continued to lose as expected.