A surgical handpiece system for use with a drill bit having an identification feature that includes magnetic material. A handpiece transfers torque to the drill bit to rotate the drill bit. A measurement module that includes a housing is coupled to the handpiece. A measurement cannula made of a non-magnetic material surrounds the drill bit during operation. The measurement cannula extends forward or rearward relative to the housing and has a distal end adapted for placement against a workpiece. A transducer assembly generates a transducer signal based on a position of the measurement cannula relative to the housing. A sensor generates an identification signal responsive to a magnetic field or magnetoresistance of the identification feature of the drill bit through the measurement cannula during operation. A controller receives the identification signal and identifies the coupled drill bit corresponding to the received identification signal.