I have a 4x12 Leo but there is no way i could use a target any smaller that a deer or coyote past 250 or 300 yards because the cross hair would cover it up.
Disregarding all other factors that effect accuracy... you can, potentially, shoot sub minute groups with your 4X12... or even less magnification for that matter.
As you've sort of
figured out, it's all a matter of your target working with your reticle. If your reticle grossly subtends the target, you'll have a tough time positioning the reticle in exactly the same spot on target... but if you have a target that works with your reticle rather than against it, you can produce a consistent, fairly precise hold.
Example. Lets say, for the sake of argument, that your standard crosshair reticle subtends 10" at 500 yds. What would work nicely is a 12 or perhaps 14 inch, white crosshair target with a thick contrasting outline. With the reticle centered, you have a crisp, white border that the eye can easily "square up" or center on consistently.
When you shoot a group at 100 yds, you (probably) aren't aiming at the previous bullet hole, you're aiming at a reference. The only difference is that at 500 or more yards, you need a different reference to be accurate.
Imagine the target below... but the bars of the crosshair are 12" wide.
I use a 50X with an 1/16" dot/crosshair for 100-300 yd benchrest... but to be competitive, I'm trying to shoot 1/10th MOA or less, so I have to be able to split very fine hairs. For anything that isn't competition, I seldom use more that a 20X variable scope.