I can't help you in the derivation department, but my grandmother too used this word. When we said something she didn't believe or said we couldn't do something she wanted us to do, she would reply, "Oh Pishtosh, you can too." I think a rude person would use bullsh** for this same word, but I don't think Grandma was thinking she was using a nice form of a vulgarism when she used it. It was just the thing she said in these instances.