Consider a cone. It is a rotated line segment $f(y)=\dfrac{r}{h}y$ (leaving it without a base). We know its volume (if it had a base) will be $\dfrac{\pi}{3}r^2h$, and its surface area (without the base) will be $\pi r\ell$.
To find the volume, we take the integral of the function of the areas of concentric circles. Essentially, this is like breaking up the cone into small quasi-cylinders, then taking the limit as they become infinitesimal.

Looking at a finite one of these, the volume is $\pi R^2\,\mathrm dy$. Notice that if there are $n$ of these slices, $n\,\mathrm dy$ will be $h$, the height of the cone, as we expect.
We have no problem integrating $\displaystyle\int_0^h\pi\left(\frac{r}{h}y\right)^2\,\mathrm dy$ to get $\dfrac{\pi}{3}r^2h$, and we don't have to do arc length.
Now the problem comes when we try to find the surface area of the cone with integration. What you were doing was taking the integral of the function of circumferences of concentric circles. This seems analogous to the area of the circles last time, but it's not.
You have to realize that like last time, we are looking at that slice of the cone, but this time we're adding up the surface area. It's an approximate rectangle, so the area is $2\pi R\,\mathrm dy$. It's just like what you were doing.
The problem arises when you see that with $n$ slices, $n\,\mathrm dy$ should be equal to the slant height $\ell$, not the height $h$ like last time. The slant height is just the arc length of the line segment. $\mathrm dy=\dfrac{\sqrt{1+f'(y)^2}}{n}$ instead of $\dfrac{1}{n}$ last time.
So you just take the integral $\displaystyle\int_0^h2\pi\frac{r}{h}y\,\mathrm dy$, and you replace $\mathrm dy$ with $\sqrt{1+f'(y)^2}\,\mathrm dy$. Then you integrate $\displaystyle\int_0^h2\pi\frac{r}{h}y\sqrt{1+\left(\frac{r}{h}\right)^2}\,\mathrm dy$ and get $\pi r\sqrt{h^2+r^2}$, the right answer.
Essentially, that slice of the cone is not a cylinder. You can pretend it is when integrating for volume, since the shape of the outside does not matter to you then, but you can't ignore it for surface area.