Objectives: We explore the cost of care of type 2 diabetes mellitus (T2DM) using time-driven activity-based costing (TDABC) and connect that cost to resulting patient health outcomes. Design: We construct six care pathways varying from low-risk to high-risk patients over a 12-month cycle of care. We collect time, resource and cost data on activities in each care pathway and compute a time-driven estimate of cost. Use of patient outcome data highlights the health outcomes achieved. Setting: Primary, secondary and tertiary care. Participants: Medical staff involved in the care of patients with T2DM. Primary and secondary measures: Primary: resources consumed to provide T2DM care. Secondary: health outcomes for representative patient within each patient category. Results: By computing cost of T2DM care and associated complications of chronic kidney disease, active foot disease, moderate risk of active foot disease and myocardial infarction, we show that when patients develop acute complications, significant costs are incurred, as compared with the cost of maintaining a patient at low or moderate risk. Variance analysis further informs decision making by showing the need to have the right personnel doing the right tasks at the right time to control costs. Conclusions: A TDABC approach facilitates an understanding of the drivers of cost in chronic illness care. Our paper highlights the stages in the care pathway where different settings, decision making and a more optimal use of resources could assist with achievement of better patient outcomes.