Objectives: This analysis estimates the whole‐of‐system direct costs for people living with dementia in residential care by using a broad health and social care provision perspective and compares it to people without dementia living in residential care.

Methods: Data were collected from 541 individuals living permanently in 17 care facilities across Australia. The annual cost of health and residential care was determined by using individual resource use data and reported by the dementia status of the individuals.

Results: The average annual whole‐of‐system cost for people living with dementia in residential care was approximately AU$88000(US$ 67 100) per person in 2016. The cost of residential care constituted 93% of the total costs. The direct health care costs were comprised mainly of hospital admissions (48%), pharmaceuticals (31%) and out‐of‐hospital attendances (15%). While total costs were not significantly different between those with and without dementia, the cost of residential care was significantly higher and the cost of health care was significantly lower for people living with dementia.

Conclusion: This study provides the first estimate of the whole‐of‐system costs of providing health and residential care for people living with dementia in residential aged care in Australia using individual level health and social care data. This predominantly bottom‐up cost estimate indicates the high cost associated with caring for people with dementia living permanently in residential care, which is underestimated when limited cost perspectives or top‐down, population costing approaches are taken.