Help me understand the calorie in/out with exercise

Yes, that's how MFP is designed to work.

You're given a calorie goal that will help you meet your weight loss goal even without exercise. If you add exercise, you're increasing the size of your deficit. So to make sure you avoid hunger, meet your nutritional needs, and maintain energy, you get to eat more food to account for the extra activity that you're doing.

Some people find that the calories you "earn" are over-estimates compared to what they're actually burning through exercise, so it is often recommended to begin with eating a portion of the calories back (say, 50-75%). If you find that you're still losing faster than expected, you can go ahead and eat more.

What janejellyroll said.

It's best to assume it's overestimated, since it's all a guesstimate anyway. Short of expensive analysis, you'll never really know exactly how much you're burning. Just log, pay attention, and tweak as needed.