I have got the Enhanced Dwarven Crossbow in Skyrim and I have upgraded it to Superior and it keeps saying when trying to upgrade it again "You do not have the level needed"
Can you go higher than Superior?
Have you put a perk point into Dwarven Smithing? If not superior is all you'd be able to get.
Also if its magical, you have to put a perk point into Arcane Smithing to improve magic items. I doubt this is your issue, since you said you got it to superior.
See this Skyrim Blacksmithing youtube video. for the blacksmith list.
PS I have no idea the quality of the video, I just used it as a reference.
Items can be upgraded to legendary status. I have legendary Daedric and Dragon-Plated armour. I believe it is only possible to Make legendary stuff when you've reached 100 in smithing; Which is really easy and only takes about 10 minutes. Just buy some materials to make an Iron dagger, make several, Sell them, use that money to buy more supplies, repeat. Takes no time at all.