Objective Hospital utilisation research is important in pursuing cost-saving healthcare models. Tonsillectomy is one of the most common paediatric surgeries and the most frequent reason for paediatric hospital readmission. This study aimed to report the government-funded costs of paediatric tonsillectomy in the state of Victoria, Australia, extrapolate costs across Australia, and identify the cost determinants. Methods A population-based longitudinal study was conducted with a bottom-up costing approach using linked datasets containing all paediatric tonsillectomy and tonsillectomy with adenoidectomy surgeries performed in the state of Victoria between 2010 and 2015. Results The total average annual cost of tonsillectomy hospitalisation in Victoria was A$21 937 155 with a median admission cost of A$2224 (interquartile range (IQR) 1826-2560). Inflation-adjusted annual tonsillectomy costs increased during 2010-2015 (P < 0.001), not explained by the rising number of surgeries. Hospital readmissions resulted in a total average annual cost of A$1 427 716, with each readmission costing approximately A$2411 (IQR 1936-2732). The most common reason for readmission was haemorrhage, which was associated with the highest total cost. The estimated total annual expenditure of both tonsillectomy and resulting readmissions across Australia was A$126 705 989. Surgical cost in the upper quartile was associated with younger age, male sex, lower socioeconomic status, surgery for reasons other than infection alone, overnight vs day case surgery, public hospitals and metropolitan hospitals. Surgery for obstructed breathing during sleep had the strongest association to high surgical cost. Conclusions This study highlights the cost of paediatric tonsillectomy and associated hospital readmissions. The study findings will inform healthcare reform and serve as a basis for strategies to optimise patient outcomes while reducing both postoperative complications and costs.