Objectives To examine the cost of care for people with dementia in institutional care settings, to understand the major cost drivers and to highlight opportunities for service development. Methods Data on 277 residents with dementia in 16 UK residential or nursing homes were collected. We estimated care and support costs and fitted models to the data. Sensitivity analyses were also conducted. Results Care home residents cost £792 weekly: 95% of the costs accounted for by direct fees. Hospital contacts contributed the largest proportion of the additional costs. Having an established diagnosis of dementia (b = 0.070; p < 0.05) was associated with higher costs. No association was found between cost and needs (b = −0.002; p = 0.818). Conclusion The absence of an association between cost and needs emphasizes the importance of a more needs‐based costing system which could result in clinical and economic advantages. © 2016 The Authors. International Journal of Geriatric Psychiatry Published by John Wiley & Sons Ltd