Objective To examine the impact of type 2 diabetes on direct and indirect costs and to describe the effect of relevant diabetes-related factors, such as type of treatment or glycaemic control on direct costs. Design Bottom-up excess cost analysis from a societal perspective based on population-based survey data. Participants 9160 observations from 6803 individuals aged 31–96 years (9.6% with type 2 diabetes) from the population-based KORA (Cooperative Health Research in the Region of Augsburg) studies in Southern Germany. Outcome measures Healthcare usage, productivity losses, and resulting direct and indirect costs. Methods Information on diabetes status, biomedical/sociodemographic variables, medical history and on healthcare usage and productivity losses was assessed in standardised interviews and examinations. Healthcare usage and productivity losses were costed with reference to unit prices and excess costs of type 2 diabetes were calculated using generalised linear models. Results Individuals with type 2 diabetes had 1.81 (95% CI 1.56 to 2.11) times higher direct (€3352 vs €1849) and 2.07 (1.51 to 2.84) times higher indirect (€4103 vs €1981) annual costs than those without diabetes. Cardiovascular complications, a long diabetes duration and treatment with insulin were significantly associated with increased direct costs; however, glycaemic control was only weakly insignificantly associated with costs. Conclusions This study illustrates the substantial direct and indirect societal cost burden of type 2 diabetes in Germany. Strong effort is needed to optimise care to avoid progression of the disease and costly complications.